Changes CWB Pricing Alterative (Fixed Price and Basis Contracts)

[charliep]

The CWB released some information on the fixed price and basis contracts for the coming year. No details but my understanding is that spreads will be based off the PROs instead of initial payments. Medium quality wheats such as prairie spring red may be priced off Kansas City (mainly hard red winter wheat) versus Minneapolis (hard spring wheat). The above is speculation until details are released.

Will you be using the CWB contracts this year? What will you be looking for in them?

[TOM4CWB]

Charlie,

My understanding is that the intial basis that I would sign up for before August 1st would be based on the PRO for the basis, however the initial price spread would determine the grade spread between the different quality levels in the class.

EG. #1CPS will be the base grade for CPS, with the initial spread between #1 and #2 being the basis spread between the grades.

By going to the Kansas City and Minneapolis futures I believe this will only make things less flexible.

If I have CPS and CWRS on my farm, and neither can go to the CWB because of the insulting undervaluation in the feed classes, now I have lost the ability to get the best quality from either of the two classes to go to the CWB. My risk increases, and I see no real decrease in the CWB's risk so they would be able to narrow the basis.

If the basis does not narrow, then we have failed to "maximize" our return, which makes this whole exercise useless, as extra risk I will take on returns nothing more to my farm.

I really am disappointed that the CWB does not benchmark the PPO system against the pooling system, but maybe noone would use the PPO's if they knew how badly the basis is skewed against PPO contract pricers?

The Futures has paid the CWB big money on these contracts, yet the PRO has barely droped for cash sales.

Is the real story we are being told that pool pricing is the only way to get a "reasonable" a basis as can be gotten from the CWB?

[charliep]

Tom4cwb

Based on what we know today.

I will likely have people aware and using the CWB producer pricing options for CWRS wheat. A note is this can be a usefull tool for anyone that is planning on playing the which crop year pool should I price into game (I'll let people ask questions).

The best forward pricing market for prairie spring wheat remains the domestic feed market. You can lock in prices well above current new crop PRO levels. If you want to hold the upside open in case of drought, I would own some options (likely corn calls) but would be patient.

If the CWB had a pricing alternative for durum, I would be taking steps to lock the current PRO in right off the hop this April.

Others thoughts.

[TOM4CWB]

Charlie,

Crop Insurance favours high protien CWRS, so I would agree that some limited PPO contracting is useful to the average farm who can consistantly grow #2CWRS or better.

My point was that this year I will likely plant less wheat for marketing through the CWB, which I would not think was the objective of the PPO pricing option changes!

The basis is still the determining issue of whether these contracts will be usefull or not.

Will the CWB narrow the basis again this year?

If the basis is narrower, will we actually be better off using the PPO as the basis could widen out during the 02-03 crop year, meaning this might be a good basis tool this year?

Will the CWB loosen up the exit rules on these basis contracts for those with Hail, drought losses?

[charliep]

It is interesting to speculate what the basis might have been. On the Friday prior to the 2002/03 announcement, MGE Dec. 2002 futures closed about $3.285/bu. The loonie was worth about .6283 US bucks. The math that day would have resulted in a calculated price of about CDN $192/t. The first 2002/03 PRO (1CWRS 13.5 % protein) was $215/t or $23/t over. Assuming a $10/t cost of risk, administration and value of money, the CWB basis on this day would have been $13 over. Can anyone remember last years basis - seems more like about $18 over.

I find CWB basis interesting in terms of how we talk about. Basis is normally the difference between a cash and futures price. In this case, basis is the difference between a specific futures price (converted to Cdn $/t) and a forecast average price for a years sales. After 2 years of observing, I am still not sure how to comment whether a CWB basis is good or bad (other than looking at history).

Others comments?

[TOM4CWB]

Charlie,

We can compare PNW US HRS prices with the Vancouver BC port price.

It seems that the CWB is significantly less bullish now than they were in Dec. 01, when Crop Insurance prices were established!

For a #2CWRS 13.0 wheat to be worth Alberta average $176.00/t on farm, this would have meant that the CWB had to have been thinking a #1CWRS 13.5 was worth $224/t!

I believe the CDN dollar is likely the biggest influence on the value of our wheat, as when I bar graphed the Cash Minneapolis over the last 4 years it was very steady between $3.50 and $4.00 for a #1CWRS 13.5 equivalent.

Maybe if we had a better Idea where the CDN $ was going, we would be smarter in knowing where milling wheat prices are headed?

[charliep]

Just a comment that the crop insurance process for establishing insureable prices seeks input from the CWB (not likely as much as you think) but the final decision is made by the Agriculture Canada in consultation with the provinces. Forecasting prices 9 to 10 months ahead of harvesting a crop is an inexact process to say the least.

I will leave to others to sort out your comments on the loonie. We have sat in the 62 to 63 cent range for a long time. My suspicion is the loonie will break out one of these days. The million dollar (or 1.6 mln lonnie) question is whether it will be lower or higher.

[TOM4CWB]

Charlie,

I have heard from Crop Insurance indirectly that CWB forcasts have a major impact on the December Crop Insurance process for the next crop year.

Rye and Triticale forcasts are out of line with nutritional values for feeding of the crops. It is a shame when the process of forcasting actually increases farmers risk and Crop Insurances loss, instead of mitigating risk as it was designed to do!

Maybe the CWB would comment?

[charliep]

On crop insurance, the CWB provides input in the first set of crop insurance pricing levels but a combination of analysts from the ag Canada and the provinces provide the ultimate forecasts.

On rye and triticale, current crop insurance values are based off current discounts in the feed market. You are right this undervalues both these crops relative to feed value but that is not a crop insurance issue. As an industry, people who grow rye and triticale need to work to price their crop more on protein and energy values. This involves setting up long term relationships with customers that ensure growers better prices but also buyers consistent supplies. (Feed peas are in this category as well).

Another area is new uses/expanding existing ones. A thread that Lee M. started highlighted the fact that at least one of the distillers is struggling to find rye. A challenge is for rye producers to find these opportunities prior to seeding and develop this relationship.