Fusarium

[charliep]

My assumption is there will be more incentive for the short to deliver with the long scrambling to get out of the contract.

The point to be made is there will be more uncertainty around this contract and this needs to be considered in both hedging programs and basis by all members of the industry.

Implications are I would tend to use futures to hedge the sell side (barley producer) and let the smoke clear a little more before I booked basis (particularly if I was in Alberta/felt comfortable that I could hit the quality parameters in SK./MB.). The program creates more uncertainty as a hedger on the buy side so am not so sure what I would do with either futures or basis. Alberta buyers will potentially have to include a new clause in their contract will commits the seller to providing the necessary documents indicating the grain is fusarium graminearium free.

[rain]

How does the short get out if know one buys.

[charliep]

On any futures transaction, there was both a buyer and seller. My assumption (good, bad or indifferent) is there will be more tension on the buy side when time comes to lift the hedge. A feed lot operator will for sure want to lift the hedge or risk in getting delivered on in an out of position/getting grain delivered that won't meet Alberta specs (this tension exists in the current market). To lift their hedge, they will have to sell futures. You are right when there are more sellers than buyers, prices come down.

[rain]

I am not sure at this point how many hedgers would get into this market as they become more aware of what the supposed reason for the futures tanking. So for the sake of arguement barley futures are dropping solely on the fusarium issue. I do not think neither you or I would Hedge (buy) these levels as a hedge today.

Some say the Winnipeg Wheat futures is a dog because fusarium is in the contract. If this is so risk is to the buyer. If fusarium can not be delivered into Alberta would the risk not be to the seller.

[rain]

How much does it cost to do a test for fusarium?

Can any lab do it? Can grain companies do it on site?

[ianben]

Hi Charlie

Here in UK fusarium is becoming more of a problem too. Buyers looking for lower and lower levels.

We have two fungicides avaiable Folicur Tebuconizole and Amistar azoxystrobin.

For best control both need to be apllied and timing is critical.

Think our HGCA have done research on this.

Try web site www.hgca.com

[charliep]

Ianben - Hope all going well crop wise.

Rain - You are likely right that feed grain users can be patient in forward pricing their needs. Having said that, having at least some cash grain forward priced with a good basis/holding some corn calls as insurance is a good strategy for risk managers. The assumption is perfect weather for N. American feed grain production and this may not happen. Hard to see prices (at least for corn) pushed too much lower - could be a market that bleeds you to death by losing carry every time a contract goes off the board.

The futures contract specs. for barley futures are 1CW basis CGC tolerances - 1% fusarium head blight damaged kernels. The delivery spec. on feed wheat is 2%. Again, this is a visual grading factor.

The test for the presence of the disease on seed has to been done in a lab and takes about 10 days to 2 weeks to get results back. Elevator companies will not be able to do this at local facilities so it will have to be sent out to recognized labs. Cost of the test if something I haven't checked into but may be in the $50 to $70 per sample area.

[rain]

Charlie I posted a question to you a week ago about delivering barley against the futures.

If some one is now short with the idea of delivering against the futures. (Assume 0 tolerance provincially) as we get close to delivery I indicate I wish to take delivery. Short can not deliver is he not at greater risk?

[charliep]

WCE futures market delivery (western barley anyway) is sellers notice and location. A farmer in SK. can deliver against futures in his home region. It is the buyers responsibility to pick it up there. A buyer could take delivery of grain they don't want/couldn't bring into Alberta. They would be forced to sell it in the local cash market (quite likely at a discount to Alberta).

[rain]

So we run the risk short wants to deliver and no one will buy western barley futures because they do not want contaminated grain. Trade in barley futures could go the way of the flax, or wheat contracts in Canada.

This could be a real ouch to the futures contract.