BPC 8.94 with more flexibility than SPG Minot

[cityguy]

Grade/spread risk is very difficult to manage in any wheat market. As I said, in the US grade/protein discounts/premiums will be determined at time of delivery if you deliver something different then was contracted. Maybe the standard US bid is for #2 NS/DNS 14 protein grading factor discounts/premiums along with protein premiums/discounts at time of delivery to apply. So pretty tough to manage those risks.

On the CWB side, it's so convoluted as it is, but maybe they do have to have a daily set of "floating" discounts/premiums that apply to non-pooled wheat at time of delivery.

[charliep]

cityguy

Would be nice to talk more about market strategies but never gets traction here. Much easier to talk politics than markets.

On the mechanics of CWB PPO risk management and programs being offered to farmers, almost all the successful newly elected directors identified getting payments/money to farmers earlier as their priority (I take them at their word). I think there is good reason for farmers to be aware of the mechnanics of CWB risk management processes and impact on a farmers ultimate value of their product. There are elements of effectiveness and cost. You can then go to the PPO contingency fund which needs clarity and ultimate accountibility from the organization (both operations and BofD) - a slush fund if you like. Never gets comments here but this does not bode well for the future of no government guarantees and a massive fund that covers the risk of the entire pooling system.

[charliep]

cityguy

Last sentence. Yes. Daily spreads based on the market.

[cityguy]

Think it's fair to say that the biggest hit to the contingency fund was when the CWB had the DPC up and running. Trying to manage a "US basket" price in years when the US wasn't necessarily the world wheat price benchmark was going to be a loser no matter what. Unless the CWB simply matched up DPC purchases with US sales and took the "above" average US sales out of the pool, thus lowering the pool value, there was no way that they or anyone else would have been able to turn the DPC into a money maker for the CWB.

Last year, and to a greater degree this current year, you have to figure that the contingency fund is going to be growing on account of the CWB "trading" activities, most noteably the barley and feed wheat trades. Not sure of the mechanics of money moveing from feed barley/wheat pools but it's pretty obvious that the CWB has been able to originate a lot of those two commodities are good $20 under where they are selling.

Also - are the various EPO values "self insured" or is the CWB actually buying wheat and dollar options and re-selling to growers at virtualy no cost? Does all the EPO money go into the contingency fund, with one reason being it's a contingency fund is that in bearish years there may be money coming out of the fund?

[charliep]

Would go back to the 07/08 annual report and highlight the fpc took a hickey like the dpc. From comments on the inside, a learning year of mistakes. Other issues like cash trading and the epo are dealt with fairly well in annual reports. As an example, the epo risk management costs are segregated. The epo's have always been a net contributor to the contingency fund by the way.

Whether some of this transfer is self risk management and shows up in internal transfer to the pooling accounts is something I don't know/don't think anyone outside the CWB would. I assume the auditor would look at this and if a CA firm didn't have the expertise, they would check with someone who did. From an old life, using the word chartered accountant and risk management understanding in the same is a bit of an oxymoron.

[charliep]

I have bored farmers to death a long time ago but find the questions about the mechanics of CWB risk management interesting. On the old dpc, they always a showed a loss. Is the loss determined relative to the pooling system (money taken out to float the dpc which is a net gain the farmer using the old dpc) or actual market losses on futures/cash sales etc. What flips my head around is PPO risk management from the CWB side is not market risk as such but rather risk to the pooling system.

What is price risk to a farmer and what is price risk to the CWB are two totally different things.

[jdepape]

cityguy:

The biggest hit in the Contingency Fund was in 07-08, due to improper hedging. The CWB hedged a 4 mmt PPO program by putting all the short hedges in the nearby and rolling it. A huge position that created the inverses in the futures that caused the huge losses. The CWB was its own worst enemy.

What made it worse was that the CWB was also shorting futures in the pool account and did the same thing - everything was put in the nearby, and rolled through the inverse.

The CWB lost $226 million in the wheat pool account and $90 million in the PPOs (which then hit the Contingency Fund). Even though the CWB had record profits from barley cash trading that year, it wasn't enough to keep the CF from going red.

You would think they would have learned. 07-08 was the third year in a row that the CWB lost money in the PPOs.
05-06....$7 million loss
06-07....$40 million loss
07-08....$90 million loss

In 08-09, the PPOs made record profits (of about $44 million) due to the CWB applying excessive risk discounts of about $24/tonne. (which they keep, of course). You'll remember they said they would recover the losses in the CF as quickly as possible. Well they did - the farmers who participated in 08-09 paid for it.

[charliep]

I am likely the only one that re-reads the CWB annual reports (maybe the only one that reads them period) but your comments on risk management made me go back to the 2007/08 version. The DPC represented 15 % of the volume of the PPO cash programs that year (final one) and 20 % of the losses. An interesting explanation of risk in the write up particularly as related to basis.

[URL="http://www.cwb.ca/public/en/about/investor/annual/pdf/07-08/2007-08_annual-report.pdf"]page 62[/URL]

[charliep]

You beat me John. Interesting that the B. of D. decision in 2008/09 was to transfer $16 million to the pricing pools. Never understood why the board of directors made this decision other than politics.

Any one want to bet the contingency fund is fully funded back to $65 million in the 2009/10 annual report?

[charliep]

Mistake alert. Contingency fund maximum is actually $60 million (not $65 million).

[URL="http://www.cwb.ca/public/en/about/investor/annual/pdf/08-09/2008-09_annual-report.pdf"]page 70[/URL]