Proposed New CWB Payment Options

[johnseba]

The CWB will be talking for farmers through focus groups and surveys about three different payment options they are considering: <br> 1. fixed price contracts (price before in the crop year e.g. March -June)<br> 2. early pool cash out (get your money out during the crop year)<br> 3. pool equity loan program (borrow against you projected equity in pool account). <p> These are very significant programs. Farmers are advised to look at these options very closely. To see the CWB information, go to the CWB home page at http://www.cwb.ca/<p> Presently it is the main news item in the top left corner. If you look at a later date, you will find it under the June 1999 news releases.<p> Let's talk about this here! This is a great venue for asking questions or commenting on the pros and cons of these options.

[charliep]

The CWB new pricing tools are long overdue as alternatives for farm managers to manage their risk/cashflow needs. To stir up the pot a bit, however, I will question the use of pool return outlooks and estimated pool returns as the basis for these alternatives. The PRO/EPR are meant to be forecasts to be used in management decisions and not prices in the traditional sense (i.e. the CWB may choose to be more bullish/bearish than the market at that time to get signals out to the farm community). Wouldn't it make more sense to use a Minneapolis futures price for 1/2 CWRS wheat and Kansas City for 3CWRS/prairie springs backed off into the country. This would result in a more visible spot price related to the actual market. A further benefit would be to better enable the CWB to manage their risk position as a result of using these pricing activities (i.e. make sure that these pricing alternatives do not impact the overall returns for the people who choose more traditional CWB alternatives). Any thoughts?

[charliep]

The CWB is not holding public meetings on this at this stage. They are holding focus groups to which they are inviting about 10-15 farmers in an area.

[charliep]

Charlie, the rationale for using the PRO for the fixed price contract is to satisfy the requirement to ensure that the exercise doesn't provide advantage or disadvantage for those who don't participate. The PRO is a price forecast, that's true, but it is based on the anticipated saled program. This aspect provides the weighting between the futures contracts for hedging purposes, covering the whole marketing cycle. The risk management strategy is to lift the CWB's hedge in proportion to the progress of the sales plan. If the program was a 'back to back' sale (ie take delivery against a specific futures contract month), it would reflect the value of the North American market, which is a high value to the pool (ie the non-participating farmers). Taking this value from the pool presents a disadvantage to non-participating farmers. By pricing off the PRO, the sales plan proceeds as normal, with deliveries not being identified as destined to a specific market, which would introduce increased basis risk which can't be hedged as well (ie delivery in Peace River at a value based off Mpls would be a different basis calulation than the current freight back off). The same rationale is behind using the EPR for the Early pool cash out and Equity loan programs. I'm curious to hear comments and more discussion on this... Tom

[juntersc]

Two project reports are available on line from the University of Alberta, Department of Rural Economy. Staff papers 99-01 (Unterschultz, Brooks and Akabua)and 97-02 (Unterschultz and Novak) are research on the use of fixed price contracts and early pool cash outs. These papers are in pdf format and can be accessed under publications. While technical in nature there is a summary of the results at the beginning of the report. These two projects were funded by the Alberta Agricultural Research Institute and the CWB. Regards Jim Unterschultz Department of Rural Economy University of Alberta

[charliep]

In looking at this issue, I think it is important to separate out the issues of risk on the futures side and basis/CWB pooling deduction risk. Protecting the overall all CWB pricing pool on the futures risk side is relatively easy. The CWB would buy grain from farm managers outside the normal pooling process and immediately sell futures to remain pool neutral on this transaction. The basis/pooling deduction risk is more difficult. As you indicate, not all sales are to premium N.American markets. It does not include other factors that impact pool deductions such as the freight adjustment factor and impacts of timing of sales. Couldn't these issues be handled in the CWB deduction similar to the way it is now for the CWB buyback program? That is, convert all prices back to a central Sask. point that is farthest from the Vanc/St. Law. pooling locations and adjust the deductions to include all the factors that go into a normal CWB deduction. The process would be similar to the one used for the CWB buyback program for farmers who want to export their wheat to the US.

[charliep]

What is the web address to get at these publications Jim? Just a suggestion but it would be intersting to have some of the finding/executive summary put in the specialists corner area. Charlie P.