Miniapolis Wheat Inversion

[ado089]

Why is the spring wheat market inverted? We're last to harvest on this years cylce, are they expecting big things from Canada?

[charliep]

Not sure myself. Would have to follow cash markets/basis to watch the old/new crop spreads.

Nice rally in spring wheat. Interesting chart.

[URL="http://farms.com/FarmsPages/Markets/tabid/214/Default.aspx?page=quote&sym=MWU11"]MGEX wheat futures[/URL]

Basis on fpc's going south. CWRS FPC now $11.32 under. No adjustment factor (don't necessarily know what this means either).

<a href="http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/fbpc-wheat-2011-mhrs-20110818.html">Aug 19 CWRS FPC</a>

<a href="http://www.cwb.ca/public/en/farmers/producer/historical/pdf/2011-12/2011-12fpcbpccharts.pdf">chart 12</a>

Will note your question is somewhat irrelevant given the reference is a flat price relative to the PRO with some interest and storage paid.

Will have to think through more than I have here but may open up some opportunities on the basis contracts and choice of which month. If the market is an inverse today (small one) in the 2012 months and you see going to carry, what impact would this have on selection of contract month. This has to be put against the against the actual basis when sign. A shitty basis remains a shitty basis. A good basis remains a good basis. After 10 years, still have a good handle on what a good CWB basis is.

[charliep]

last sentence. Still don't have a good handle on what a good basis. From the reference at the CWB meetings, open market crops compete for delivery with basis. No requirement to do this for CWB wheat.

[ado089]

I know what you mean. It seems that every time I think I have it figured out they change the rules. The wide basis suggests that the marketing experts in Winnipeg have already sold quite a bit of low price wheat. The chart looks like we should have clear sailing up to $9.75

[charliep]

My understanding though is that large sales of wheat in rising market should mean a negative adjustment factor.

My understanding of the daily price as explained to me is it is a blend of US, Aussie, European and Former Soviet Union competitive markets. My interpretation is the CWB is likely doing major amounts of business in markets outside the North America and in direct competition with cheap Russian, Ukraine and other cheap competitors. Basis levels levels in the US may be weak as well as harvest time.

[ado089]

My understanding of the adjustment factor is that it is used to hedge risk. The adjustment factor doesn't usualy kick in until sept if I recal corectly.

[charliep]

Actually went to look for the historical adjustment factors from previous years and this information appears to be removed in the revamped CWB website. Other years there has been some adjustment factor although small. The CWB likely has around 10 % of the forecast pricing pool size sold by the beginning of the crop year.

[charliep]

I will go over the adjustment factor as it was explained to me. Am making the number big and goofy but hopefully explains/makes math easy.

Total expected CWB crop year deliveries - 21 million tonnes.

By August 15, the CWB had priced 1 million tonnes. The average price to date is $200/tonne.

The expected average sales price over the remainder of the crop year is $300/tonne for the remaining 20 million tonnes.

In a perfect world, no wheat would be sold/everything sold at $300/tonne. Not a perfect world for any crop (could have been canola in the example). The $100/tonne lower price for the 1 million tonnes ($100 mln) is covered by the remaining 20 mln tonnes that is expected to be sold or a net drag/adjustment lower of $5/tonne. todays $300/tonne price (effectively the fixed price contract or flexpro if signed) will be adjusted lower by $5/tonne to reflect the existing sales.

Could have done the same thing with similar volumes but the 1 mln tonnes of wheat in the pool averaged $400/tonne and existing sales are $300/tonne. The adjustment factor would then be a $5/tonne positive or addition/benefit. That is existing sales add value to the published fpc/flexpro.

Hopefully I have right. If right, credit goes to CWB FBR/Wendy. If wrong, I will take the heat.

[charliep]

The historical 2010/11 daily fixed price/basis contracts by day are on the CWB
website now. Adjustment factors so far in August 2011 (2011/12 crop year)
have varieted from zero to about $2/tonne over. Last year, august adustments
ranged from $1/tonne under to $2 over.