Grain handle for 2002-03

[TOM4CWB]

Charlie,

Have you heard any estimates on projected Canadian prairie output of export grains?

A rumor is that the CWB is budgeting for the Highway 16 Alberta coridor handle to be at 10% of normal, yes I did mean a 90% decrease in elevator handle of CWB grains...

If anybody hasn't said UNCLE yet, I think this is about enough!!!

UNCLE UNCLE UNCLE...

If this is not a disaster, in the magnitude never seen before...

Ice storms got disaster payments, flooding gets disaster payments,

Why shouldn't drought get one to???

This is obviously not at all within the normal range of expectations,

Is see the US has programs for drought disasters for those without crop insurance... how about extending FIDP till after March 2003, so we are not left high and dry without a disaster saftey net?

[TOM4CWB]

Charlie and Lee,

Is the reason the CWB 2002-03 PRO for June was so bad, is because the CWB hedged a large amount of wheat at those prices, so the couldn't honestly raise the PRO because they already sold the wheat???

I asked this winter at the accountability meetings about CWB sales procedures, as in the past the CWB did not pre-sell large portions of the crop, but kept current cash incase markets surged, that the pool would partipate in the rally...

However this time I was give no such assurance, in-fact I was told that the CWB now has such good market intelegence that they presell at the highs of the market...

I asked about keeping the pool current and not overcommitting, but I was told this was not needed any more because the CWB has such a good handle on the market...

SO HOW SHORT WAS the CWB on June 27th 2002, and how much have they lost because they speculated on the 2002-03 crop that they now can't supply???

[charliep]

Tom4cwb

I have no way of commenting on the CWB sales program. My guess would be that not a lot of 2002/03 pricing has occurred.

Comments I would have.

1) North America wheat supplies are tightening up. EU 15 will harvest a large crop. Non traditional exporters continue to sell significant quantities of wheat. Wheat is fundamentally optimistic but has not been fully reflected in prices - the PRO simply reflects this.

2) The fundamental flaw of basing fixed price/basis contracts off pool return outlooks. When someone looks at a PRO forecast, is this a forecast of likely returns or a hedgeable price for the CWB PPO's? There needs to be clarity here.

[TOM4CWB]

Charlie,

Since Agriculture is a shared jurisdiction, constitutionally in Canada, and the AB gov., through saftey nets has an obligation to pay at least part of the bill if the CWB messes up, should't there be information sharing between the AB gov. and the CWB, if the CWB makes risky marketing decisions?

I notice you haven't commented on keeping the pool current with cash sales vs. spec. selling by the CWB of new crop grain, what exactly is the CWB's position???

Is there any mechanism to tell what the CWB is actually doing other than the PRO's?

How do I mitigate CWB spec. marketing, if it is imposible to see what they are doing???

Is your dept. looking at correcting this situation, both for your risk management, and so I can manage my risk as well?????

[melvill]

Sparks thinks that the Board is justified in keeping 2003-03 PROs low because wheat importers have been and continue to be very slow at coming to N. America for their needs. Importers have been buying from the EU, especially.

One other thought is that 2003-03 PROs are being kept low to encourage delivery into the 2001-02 pools instead of holding wheat for the next crop year.

[TOM4CWB]

Lee,

If Sparks is to be taken seriously, then what happened to CWB monopoly power that extracts a premium through the single desk because of our special Canadian quality... ... ...

So the Ausies can get more, but the CWB can't???

Why must the CWB mix the PRO's and the flat pricing contracts...
How can the CWB expect us to believe that they are not extracting an kings randsom out of PPO contracts this month...
Plus the CWB is returning the tendering and transportation efficiencies "earned revenue" to the pools, but not sharing it with fixed price contract holders...

How can the CWB claim that PPO do not affect pool revenues when it is obvious that PPO's do benefit the pooling accounts?

[chaffmeister]

I have not read any Sparks material that says “the CWB is justified in keeping the PRO low” – for any reason. Rather, Sparks has said that the PRO is a long term forecast and despite the fact that wheat futures have recently exploded, the latest PRO is reflective of the CWB’s anticipated average sale price over the next 16 months or so (including sales already made). As well, subsequent PRO revisions could very well move higher as the crop deterioration pushes global balance tables a bit tighter, pushing prices higher with it.

Importers not increasing their consumption of North American wheat (yet) would not have the direct impact on the PRO as Lee is suggesting (keeping it low) - the two are not connected. Bottom line - don't make a direct connection between current market conditions (spot prices and trade activity) and the PRO (CWB's guess of future returns for the whole crop year).

[chaffmeister]

One more thing - even though the CWB may get premiums due to their "monopoly power", these would be premiums over other exporters' prices offered AT THE SAME TIME. This is what the CWB likes to talk about quite a bit. What the CWB doesn't talk about is their performance with respect to timing of sales. In other words, does the CWB sell below the average price attainable for the corp year, about average, or above the average for the crop year?

If it sells above average each year, great. (Not likely, but great anyway.) If it sells below average, not so great.

The key question is this: if we assume that the CWB captures premiums on sales, how much of these premiums are eroded due to poor timing of sales?

A crop year like this one with the wide range in "attainable" prices will provide some exposure to the CWB's sales performance as it relates to timing of sales.

[charliep]

I agree with comments but would highlight that any CWB selling that would have occurred to date would have been hedging. As with anyone who forward sold other crops for risk management purposes, you wouldn't have sold if you knew the results this summer. But that is hind sight. I would be surprised if the CWB had a lot of sales on the books.

The point raised though is that CWB marketing success should be measured on an annual pricing basis relative to the market opportunities during the year. This would involve looking at their plan and execution.

The other issue to push is that everyone should be calling the 1 800 ASK 4CWB hotline, business reps., directors, etc and pushing for a July 18 release of the PRO. US futures markets have improved and stabalized 20 cents/bu higher than the last PRO. A smaller w. Canada crop means a 9 to 10 MMT wheat ex durum export program - nearly all will be destined west coast. Most if not all will be sold to high paying/non subsidized customers. 3CWRS and all mid quality wheats will be gobbled up by the domestic feed market. If payments can't improve in this environment, then everyone needs to ask questions.

[parsley]

melville,
Did you actually read this from something Sparks wrote? If not, where did you source this information you are "sharing"?

Parsley

[melvill]

Yes, I did read those comments on delayed increases in the PROs in something that Sparks wrote. Their reasoning was that, granted, US and Canadian wheat production was dropping but, so far, very little of world buying has been coming to N. America. In fact the EU-15 have been using fairly large export restitutions to make some significant sales. I know that Charlie has suggested that a mid-month PRO with increased prices is due. That's the wonderful thing about outlook - it's forecasting and analysts sometimes don't agree

[charliep]

I note that July 18 has come and gone with no PRO. I also note that the feed market in Alberta currently is paying higher prices than the highest protein 1CWRS milling wheat PRO forecasts (both old and new crop). Market outlook has changed dramatically over the past month. Farm managers are currently making critical marketing decisions (which crop year, should I sign a basis/fpc contract, should I let high quality go to the non board) based on the best information they can find. The market needs information. I hope we will not have to wait until the bureaucratic 4th Thurs. of July to get these signals.

The most critical market right now to support in these signals is the malt industry. Our domestic malt industry is on the verge of disaster.

[TOM4CWB]

Charlie,

I picked up this news flash,


Winnipeg, MB, Jul 18, 2002 (Resource News International via COMTEX) -- The extreme heat and dry conditions experienced by much of western Canada over recent weeks has dramatically reduced production prospects for wheat and barley crops, the Canadian Wheat Board (CWB) said today.

When compared with the CWB's estimates used to calculate values contained in the 2002-03 Pool Return Outlook (PRO) released on June 27, western Canadian wheat and barley production estimates are substantially lower. The same conditions have hampered crops in the US as well.

The poor conditions have been reflected in the rising values of quality hard milling wheats. US futures markets have made large gains as harvests confirm the severe nature of the crop damage.

The CWB is releasing its newest PRO on July 25 for 2002-03. Due to the weather conditions, most grades and classes of wheat in the July PRO are expected to be up by about $10 to $20 per tonne over the June PRO. Durum PRO levels are thought to be unchanged as the durum producing regions of Western Canada and the US have fared decently during the onslaught of hot weather.

The CWB's Fixed Price Contract (FPC) and Basis Payment Contract (BPC) are calculated monthly based on values contained in the most recent PRO for the coming crop year, then follow the markets until the next PRO is released. Both the FPC and BPC will be re-adjusted on July 25 to reflect the new July PRO.

The PRO is the CWB's best estimate of the final pool returns to be paid to farmers and reflects the CWB's expected sales over the entire marketing year.


I am glad the CWB is finally speaking up, the must have got rid of most of their short position... so now they can speak up again!!!

[charliep]

Is the information in this press release adequate to make a marketing decision?

[charliep]

Sorry for harping on this but I think it is important.

My understanding is that the fixed price contract on the day can be no higher than the PRO for that class minus a discount factor for risk, carry and administration. Basis levels are the difference between the relevant calculated MGE price and the PRO minus risk, carry and admin. factors. The basis from this calculation is the one used for basis over the next month until July 31.

The problem comes when the calculated Minneapolis on the day of the PRO is above the PRO. Basis levels have to be narrowed.

Assuming the full $20/t rise in the PRO, this would happen again if the price had been established yesterday. The PRO for 1CWRS 13.5 (port based) would be $221/t (June plus $20). The calculated MGE Dec price (MGE Dec. futures adjusted to Cdn. $/t) was $214.45/t. Based on a risk, carry and admin. discount of $3/t, the basis that would be offered would be in the $4 to $5/t over area. Current Dec. basis is $11.62/t over - fpc prices as a result of the new would be down $7 to $8/t as a result of the new basis (15 cents/bu if you like). The May basis was $24.72/t over - someone who signed a May basis contract would be about 50 cents better off (other things equal) than someone who would have signed a July one.

What are my issues.

1) The artificialty of having an arbitrary date to set basis.

2) More clarity on how these basis levels are established. I am hesitant to make any recommendation when I don't understand the mechanics.

3) There should be no relationship between PRO forecasts and the fixed price contract. The fixed price contract should be a daily price adjusted for the realities of price pooling. The risk management strategy around should ensure the overall pricing pool is not impacted by daily cash pricing.

4) A factor I would push for to my directors, business reps and the 1 800 ASK 4CWB is extending the fpc/basis contracts beyond July to August or September. Again the question is why the arbitrary deadlines. The early payment option but I will put the question forward as to whether this meets farmer needs.

I look for others thoughts.