BPC 8.94 with more flexibility than SPG Minot

[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]

[jdepape]

charlie - in 07-08 the CWB borrowed about $25 million from the pools to keep the CF in the black. At the time it promised it would pay it back asap.

Back in 04-05, because of excessive profits (from hedging no less), the CF was going to go over the $50 million limit. The CWB board made the executive decision at the time to dole out $7.5 million from the PPO hedging gains to the pool accounts.

(In my view, these excessive gains were the first hint that the PPO hedge program was flawed. But it's tough to get anyone to listen to a complaint that the program is making too much money...)

When the CWB made back all the losses in the CF (and then some) in 08-09, it paid back the money it "borrowed" from the pool accounts MINUS the money it had earlier "given" to the pool accounts.

[charliep]

Yes. Always interesting to see how the contingency fund has been used to move money between pooling years.

[cityguy]

" Contribution from other revenue sources was negative $169 million, of which approximately $226 million was a result of discretionary commodity trading activity.
All other non-grain-sales revenue sources exceeded 2007-08 expectations.
Discretionary commodity trading occurs within the Wheat Pool Pricing Model, which establishes the pricing pace for the wheat pool. Pricing within the model is a
combination of actual cash sales activity and derivative trades. Pricing more or less than the daily “target” amount is regarded as discretionary trading activity.
Daily sales and derivative transactions are benchmarked to the current futures market prices at the end of each day and will generally be negative in a rising
wheat market, as was the case in 2007-08.
Note that the methodology used for benchmarking discretionary activity can result in the measurement of gains or losses that are not truly achievable in the
marketplace. In 2007-08, of the $226 million below target, $61 million was determined to fall into this category."

Trying to follow the money in the CWB final reports is next to impossible. By the looks of things the 07/08 "loss" of $226 was actually $226 below their targetted objective of being about $60 million black in their trading account. They ended up being 169 red in the trading account. Am not sure if the 169 includes the $90 million lost against the FPC/DPC (which presume the individual's who did these contracts were the "winners" versus those in the pool). It's big bucks no matter how you look at it, but also don't think that the CWB was short 4.5 million tonnes of MWH8/K8 as jdepape implies. No doubt they were short in the clearing house, but how much was for their account and how much was unpriced cash sales that they were waiting for give up's??

But I'm getting caught in the same trap as everyone else on this site. Plenty of talk about the CWB's commodity marketing policy but nothing about a Canadian farmer's commodity marketing practicality.

So in an attempt to push the conversation back to that, and to give dear old timm the floor to some degree (remember - even Norway scored a goal yesterday at the Juniors) - if indeed CWB FlexPro bids are where they are, both outright and relative to US cash bids, should farmers be sellers at these levels? Should farmers be sellers of new crop wheat futures at these levels for some small amount or for a large amount.

We're about to flip over to a new calendar year. Am sure there are many out there that would like to broaden the topic from just what could be done in a different environment to what can be done in the current one.

No doubt the passion of TOM4CWB and many others has to stay, and the historical analysis that charliep and jdepape bring are valuable, but suspect that 90% of those that read AV but don't jump into the fray are looking for entertainment (they know what the bias is and it's largely the same policy ideas circulated) but are also looking for some advice they can "trust" to help them with the here and now.

[jdepape]

Cityguy:

RE: “By the looks of things the 07/08 "loss" of $226 was actually $226 below their targetted objective of being about $60 million black in their trading account.”

The CWB’s ‘contribution from other revenue sources’ is not their trading account – it’s revenue from tendering, terminal agreements and – believe it or not – despatch. Typically, they will make a few million – in 07-08 looks like they made $57 million before accounting for the $226 million in “discretionary trading”.

I know from conversations with the CWB on the topic, that the CWB put all their short hedges (discretionary trades) for the pool account in the nearby and rolled them – just like they do with PPOs.

RE: “Am not sure if the 169 includes the $90 million lost against the FPC/DPC (which presume the individual's who did these contracts were the "winners" versus those in the pool).”

The $169M is ‘contribution from other sources’, a pool account line item, and has nothing to do with PPOs and the Contingency Fund. The $90 million loss in PPOs is just PPOs – nothing else. And the loss came due to lousy hedge techniques. The following is a statement made by the CWB on the issue:

1) “The placement of hedges in exchanges and future months plus the cost of rolling the hedges in an inverse market, never significant in the past, became very significant in the current year because of the large volatility.”

2) The CWB’s practice of hedging its PPOs against the nearby month was one that had worked well since the inception of the PPO programs.

3) Since their introduction in 2000-01, the CWB has generally hedged the PPOs against December futures. December is the first futures month available after the PPO sign-up deadline of October 31, which typically coincides with the end of the fall harvest period. The nearby month is also attractive because there is more liquidity than in months that are farther out.

RE: “...don't think that the CWB was short 4.5 million tonnes of MWH8/K8 as jdepape implies. No doubt they were short in the clearing house, but how much was for their account and how much was unpriced cash sales that they were waiting for give up's??”

First – The CWB was short 4.5 mmt of MWZ07 – some of which they would have lifted as they sold the wheat it represented, most of which they would have rolled into the MWH08. Once Mar came around, they would have reduced some again due to sales of wheat, the remainder would be rolled into the May.

Second – the CWB does not short futures “waiting for give up’s on unpriced contracts. The CWB is short for only two reasons:
1. Against flat price long cash positions (PPOs).
2. If flat price cash sales in the pool do not keep up with the pricing pace, the CWB short futures to keep pace.

I recognize that this is a little off timm’s topic but I also believe that farmers need to understand how the CWB works to make a rational assessment of it.

As for the "trust" and the "here and now", the bottom line is that you might be able to do better than the pool with these CWB programs, but farmers should know that they are starting in the hole. In 08-09 it looks like it was by about $25/tonne. In other words, you have to pick the market better by that much to just catch up to the pool.

There are better ways and farmers should be pushing for them.

[cityguy]

Thanks for the clarification. I haven't ever talked to the CWB about the in's and out's of their hedging but clearly you have and they've been pretty open with you as to what they do. Too bad they aren't as open with their stakeholders. Placing their entire hedge in the nearby is dumb. Let's say for instance that they accept 10 million tonnes on the "A" series and do 4 million tonnes of FPC/DPC's. They shouldn't be putting the net ownership - cash "ownership" less cash sales all into the nearby futures. They should look to spread out their hedges based on how much they're going to sell against the relavent futures delivery month (liquidity considered). Anything else wouldn't be "orthodox".

All good to know.

So - what should a Canadian farmer be doing in terms of marketing his new crop wheat basis today's futures prices and a bias that the basis will be 0 to 10 at the end of February. Should producers, by and large, be 0 to 10% sold, 20-25% sold, 25 to 50% sold? Or are you of the opinion that given that the deck is stacked against those that market outside of the pool that farmers should simply put it all in the pool?

Also - and this is a question for commerical producers - would the FPC's be more attractive if they were combined with a delivery window and that there was a carry shown in the various FPC delivery windows. Should those forward contracted FPC's be the only tonnes that the CWB should look to market pre-harvest?

[timm]

We need the basis component of the BPC offered
sooner !!

[cityguy]

Think everyone would agree with that and don't know why the CWB doesn't do it. Presumably because there is virtually no business being done for new crop at this point in time so there's no point. That being said, you can get new crop basis levels on non-boards plus you can get new crop basis levels in the US, so the CWB could take a flyer.

So let's say that worst case scenario is that the basis is -10.00. When put with today's futures would you be a seller of 0-10% of our anticipated milling wheat production, 10-25, 25-50 or over 50%? (You will have a basis in less than two months so you can still do futures today and match it up with the basis you're given in a couple of months).

[timm]

Easy money is usually hard to come by,i am 30%
priced !!

[charliep]

December 2011 BPC was about $325/tonne today (Dec. 30).

You can run through different scenarios about basis but likely provides a 2011/12 local fpc value above $7/bu.

Not a bad place to get started. As agreed, clarity around process and basis would make this decision easier.

[URL="http://www.cwb.ca/public/en/farmers/producer/historical/pdf/2011-12/2011-12fpcbpccharts.pdf"]new crop chart[/URL]

[charliep]

The $325 was a fpc for a 1CWRS 13.5