CWB Basis Contracts

[charliep]

A couple of points I'll make -

- I noticed I missed a ' ' sign in the little formula I used earlier in the thread for rolling forward to different futures months. It should read:
new basis=original basis (original futures - new futures)
- in response to Tom4CWb's questions re: what costs are incurred by the CWB with a basis contract:
This is a different basis contract than a canola contract. With this program, you are securing a price relationship between the PRo and the Mpls futures.

So, with a basis contract that remains unpriced through to July, the CWB will assign any difference in your basis and the calculation (FPC-futures in $C) on the last delivery day plus an admin charge and collect this value from future payments owing to the farmer from the CWB. If the basis is 'in the money' you won't collect that, and there is still the admin charge for not executing the contract. In that example though, the farmer likley would deliver or have transfered the contract to another party.

Assuming also that the farmer has a CWB delivery contract in place, there will be a liquidated damages charge of $6-25 based on anything less than 85% of the delivery contract left undelivered.

- re: are there costs incurred with other parties, etc. The CWB doesn't use these contracts to secure pricing with buyers. There are basis contracts with buyers that are used where the buyer and CWB agree on a basis level and take offsetting futures positions. When the sale is priced, both parties swap their futures positions.

Tom

[TOM4CWB]

thalpenny,

What is the cost if I requested today, cancellation of a basis contract today, that was priced off the Dec Minn. futures the last day of July?

I did not recieve an answer on the "Act of God" clauses that are in other basis contracts, and a good reason why the CWB could not outright cancel outright an unpriced basis contract. Why couldn't these be cancelled without administrative fee to the farmer?

Further, why can't the CWB price feed wheat off the WCE futures, as it is almost $40/t higher than what you are offering today?

[TOM4CWB]

TOM4CWB, you can check on the buyout price with the CWB business center - 1-800-275-4292.

Nov 29 was the last day, so you may have been assigned a price if you took no action.

This is not a delivery contract, it is a pricing contract. There are other opportunities to buy out or transfer to another party. It is not meant to be a speculative tool in that regard.

The feed wht contract is not based off WCE because:
- farmers can deal directly with the open domestic feed market and with the WCE,
- the CWB generally doesn't deliver to the domestic feed market,

an outlet is required for the farmer to deliver in the event he gets feed quality due to frost, etc. However, there is significantly less direct price relationship between feed prices and the US futures contracts, so an additional discount is taken for feed delivery agaisnt the basis and fixed price contract.

Tom

[melvill]

tom4cwb, I haven't seen a basis contract with an "Act of God" clause in it for years. Most basis contracts don't have such a clause because a basis contract represents guaranteed supply for the buyer which, you know, means that the grain or oilseed has probably have been traded to another buyer long before it is received by the company that offered the original contract.

Please be specific, if you can, about where you have used basis contracts with an "Act of God" clause.

[TOM4CWB]

Lee,

My AgPro Canola Basis Contract had this clause in it, My CanAmera Basis Contracts have a gentlemans agreement that are not written, as with my Pioneer Canola Basis Contract for this past harvest.

I find it interesting that you are surprised, may I ask why?

I am always up front when I cannot supply, and even in our dealings with Cargil and Agricore in the past few years they have been accomidative without exception.

[TOM4CWB]

thalpenny,

On the feed wheat and the CWB, I thought the CWB has said that they are here to maximise my returns, isn't that right?????

Now if you are there to make me money, then why wouldn't you sell my feed wheat interprovincially to a Canadian feed user, and get that higher return an include it in the contract you offer me?

Wouldn't it be great if the CWB competed against the WCE futures and drove them up by doing so??

If we all sold our domestic feed wheat and barley to the CWB, you could extract a real premium price, couldn't you???

Why do you instead include a discount option for yourselves that allows you to extract even more money from the $30-$40/t discounts you already offer on feed wheat?

What in the CWB Act and Regs prevents you from instead maximising our returns by handling a sustantial portion of the feed wheat grown in western Canada, and extracting a premium for it rather than discount pricing it severely?

Just what is the CWB's mandate, and how do I reconcile what you say to what you actually do in reality????

Now when I could take my "lower" grades of Canadian wheat, and get top grade in the US, plus a premium price,

but,

you force me to give back the higher price to the pooling system through the buy-back.

Why when the CWB could create competition, like on feed wheat and barley, you refuse???!!!


Why would you if your sole purpose is to maximise my returns???

[TOM4CWB]

thalpenny,

I hope you are not just ignoring us, please, are you working on these issues?

Just what is CWB policy on basis "Act of God" clauses?

Why couldn't the CWB incorporate this into a production contract like my other oilseed contracts have:

1. an assured price;

2. a delivery schedule that assures cash flow;

3. a competitive price if lower grades are produced, or an option to terminate the basis contract if the CWB cannot be commpetitive.(first right of refusal for the CWB)

These are the expected norm in the year 2001 for the rest of the Canadian economy, and my question is why the CWB cannot be flexible enough to offer what has been normal business practice in much of the business world for decades?

This is one reason why the CWB Monopoly is costing wheat and barley producers.
If the CWB took these issues to there buyers, we should without a doubt be in a very strong position to extract concessions from them.

Why does the CWB refuse to work for our benefit, causing production to decrease anf farm risk to increase?

Sooner or latter, thalpenny farmers will figure out that the CWB Monopoly is being used against them, and what will that mean for the CWB????

Will spending money on expesive media advertising saying the CWB is soo gooood.... fix any of the problems stated above????

[TOM4CWB]

Tom4CWB,

As usual, I've provided a really long answer to your questions. I don't ignore the forums, but have to priorize the time when I can respond ...

Remember, the CWB is using the milling wheat futures contracts to manage the hedge position for these programs. At the time these basis contracts are entered into, there is no way of knowing what grade will be produced. There is a relationship between milling grades (usually follow same trendline), but feed grades can be impacted by other variables (ie low coarse grain production like corn or barley). So an extra discount for this extra risk may taken if feed quality wheat is delivered against the contract.

The basis contract is not intended to be a pure speculative tool. Farmers have the flexibility to apply any grade or class of wheat (except durum and mixed grain) to the contract, and they can transfer it to another party or buy it out. I think an Act of God/lack of production clause would cause an increase in the risk premium. Rather, as you recommend in the thread on 'Revised marketing system', farmers should weigh the production risk carefully and perhaps not attempt to hedge or price more than 30%. If the Act of God clause you mention with other companies is foolproof, I'm not sure why you wouldn't try to lock in 125% of production? Because I doubt you are confident that you wouldn't be held to your commitments.

Regarding marketing feed wheat domestically - the CWB does have the ability to sell to the domestic market. However, the Board doesn't actively pursue a strong sales program in the domestic market as farmers generally service that market. There are tradeoffs between having an open domestic market and using the monopoly to supply it. Given the nature of local trading, a multitide of local buyers and local consumption, it may introduce a step in the sales process that some would resent.

It likely would have a positive impact on feed grain prices most years if the CWB had the opportunity to use disciplined selling to maximize sales of all feed grains grown in W. Canada to the highest return to pool buyers. I expect most years we would attempt to sell Japan to the max before turning to the domestic market. However, this would only be the case to the point where competitive US feed grains could be economically imported and substitued for Canadain feed grains. There are no import restrictions regarding US grain.

As it stands, the prices reflected by the CWB are essentially export prices. Farmers have a feed wheat futures contract (moderately traded), and the mechanisms have developed such that the market gets serviced by the local production. With the import of some US corn and other grains this year, I would argue that the domestic feed market is close to optimizing the price for this year.

Tom

[rain]

Are you sure you people want the CWB selling into the domestic feed market in Western Canada.
We do not have the capacity to use the CPS and #3 HRSW we grow in a normal year. Would it not be nice if the CWB could only sell export grains and we producers could make our own deals with the malster and the flower mills. I am not sure our exported grains are sold at a premium. Being some what cynical I would expect that the bulk of our premium price sales are made to Canadian value added users. Not importers that can go anywhere they want in the world to find the products they are looking for.

[TOM4CWB]

Rain,

I think you would be surprised at how much wheat the CWB sold to the "domestic wheat" users in 2001, and at what discount price!

My point of this whole exercise is to dicipline CWB sales to a process that is transparent and fair to everyone in both the export and domestic market place.

Japan does not pay more or less than the domestic crushing industry, and this is fair, why should they???

Now on feed wheat, should this also not apply equally?

I agree that the CWB should not be able to "blow apart the domestic market" as your worry about them doing ( as the "commercially sensitive info" is hinted to above, your worries are not without cause).

The CWB must begin diciplining itself by the measure of the commpetitive market place, or else we will continue destroying wheat productivity in the "designated area".

Special "deals" in the domestic or export market, that are done for the convenience of CWB sales people will never maximise returns to "designated area" wheat and barley producers.

If a steal of a deal is going to happen, please let me alone decide where and when this happens, I at least then will have no one but myself to blame.

Does everyone have bad days, and make bad decisions, even people at the CWB?

I believe in truth we are all human, therefore please allow me to be responsible for my own mistakes, not responsible for a mistake made by the CWB!

Now if I chose the CWB to be my marketer, and responsible for selling a specific lot of grain, then it is acceptable for them to be wrong once in a while.

Why?

Because if there was competition, the CWB would fear mistakes, and be much more careful, if they were resonsible marketers. Otherwise they would no longer exist, as no one would market through them!!!

I must exercise this disipline, and am responsible for this every day on my own farm, why should we allow the CWB to have it any easier than ourselves, or anyone else in the world of grain marketing?