Grain handle for 2002-03

[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.

[TOM4CWB]

Charlie,

The CWB is new at the PPO contracts, and need to take a close look at what drives the basis...

The PRO actually should be totally seperate of a price fixed off the futures, with a basis risk added to the PPO contract risk for the CWB.

THE CWB leaves the basis risk, as close as I can figure it, with the contingency fund, as they have promoted PPO contract cannot affect the pooling accounts...

The really sad part of this situation is that the CWB doesn't practice any risk management on the basis risk, and refuse to sell the grain to anyone when it is hedged which is the back to back transaction that normally reduces risk and cost of forward selling.

THe whole Idea that price pooling is the principal reason for CWB existance is a crazy one, and it is obvious that PPO contracts DO affect the Pools, as the Pools do affect the PPO contracts.

If the CWB actually had a strategic plan that allowed cash pricing to be as important as pooling, then the problems could be solved...

However, it appears the CWB needs to prove to us that only pooling will save the CWB, as it believes only the CWB can pool, which of course is false...

This is not a logical situation, as the market has been saying that the price the CWB is projecting is too low, and in essence the CWB is saying that the market is too high...

Domestic and North American prices both dispute CWB projections...

Funny the CWB claim that they are there to extract a premium, and that the single desk is the best way for this to be acheived, all gets thrown out the window when we get into a market rally like what has happened in the past couple of weeks...

All this politics really makes a person dizzy, as it looks like the single desk lowers values, and asks for less than what the market demands today... which is a funny way to extract a premium for "designated area" grain producers, isn't it Charlie???

[AdamSmith]

Charlie, the problem with the CWB fixed price is it is not a true reflection of the value of the wheat or barley.

Farmers shouldn't be put in a position of making decisions in a vacum. The fixed price or basis options are very loosly linked to Minny or KC with a strong link to the PRO. But you are absolutly right without a meaningful basis these prices are of little value to grain farmers.

In times of volitile markets the PRO itself has little value.

I've tried very hard to put my biases aside over the last several years and tried to use these CWB features as marketing tools but I just end up frustrated at the total arbitrary nature of it all.

When I graduated from university I came home dissapointed in myself for not learning more about grain marketing. It was from that disappointment in myself that led me to learn as much as I could about grain markets and marketing. I believe I was one of the first farmers in my area to get a DTN or equivilent in 1988 if I can recall.

So when you become comfortable with the Canola markets etc. and how to anylize them and use the information they provide you to make decisions it's very frustrating when you can't use that same knowledge for wheat and malt barley.

With canola I have a certain comfort level knowing what an appropriate basis level is for my area. That basis level widens and narrows and I use that information when deciding on where and when to price.

A wheat and barley fixed price should be discoverd the same way as canola or oats. But for that to happen, without it being just fixed at some arbitrary level the buyers and the sellers must be able to freely negotiate that basis level and ultimatly the price.

Why are we trying to reinvent the wheel here? Price discovery via free markets work. Price dicovery via PRO's and other arbitrary means don't. Let's use what works.

The WCE is preparing to handle the price discovery role for all barley by having the malsters and or grain co's use the wce barley price plus a malt premium. This would be wonderful if it could happen. That's the type of price signals and marketing tools farmers and the industry can use and feel confident in.

I have zero confidence nor trust in the CWB's brand of market signals and without those key ingredients they are useless to me.

[charliep]

I realize that this question has been asked before but has there been any clarity on how the CWB handles the contingency for the producer pricing options. As a disciplined hedger, the CWB should be able to handle both currency and wheat futures risk (even given the PPO contracts are off a set futures month and pooling occurs over a whole year). Basis risk exists. How is it covered? Where is the money that is discounted put? What happens is there is surplus/deficit?

Even the early pricing option involves risk (going to 90 % of the PRO). If it didn't involve risk, then the CWB would adjust the entire initial payment structure to 90 % of forecast prices on Sept. 1 every year. I am not so sure what would happen if all farmers signed EPO contracts in the fall at higher than actual total payments for the year. Would the federal government pick up the tab?

In a public/private company, shareholders (or coop for that matter) would have an equity interest. Even in organizations where the object is to pay out as much money as possible to members, there is still a need for an equity fund. Information about this equity pool would be in annual reports.

Are government gurarantees on CWB pool accounts a certainty as we move ahead? Are they consistent with the direction of the Business Risk Management push - beefed up crop insurance and enhanced NISA?

[TOM4CWB]

Charlie,

I have a big question about the durum PPO contracts..

If the CWB has used Minneapolis as the hedge, and durum has not gone up while CWRS has gone up 20/t, this will mean the CWB has lost 20/t on the durum hedges it did before the end of June...

Now, I would assume that the wheat contigency fund is paying for the losses on the durum PPO's, is this fair?

Just to have the CWB cross hedgeing durum can mean the CWB will not want Minneapolis to rise, because durum is not going up, and they will be losing big money on these hedges, so they being traders of 15 million tonnes can really affect the Minneapolis market, and distort it...

Individuals need to do individual transactions, and if the CWB uses Minneapolis for political/philosophy purposes, to prove a point, they have the ability to really mess up world wheat markets...

Again, these distortions are not maximising "designated area" growers grain value, so why do we have a CWB monopoly in the market place messing it up with national/communist purposes which lower the value of wheat and barley???

This may benefit the National industrial economies of the world, (lower costs for grain) but it is a crime against grain growers in Canada, and right around the globe...

What will happen when this pillage attitude of the grainsector is compounded by bad weather and famine, because we could not afford to store excess production, it is consumed in frivioulous consumption, then something has to give when supply is too low...

Can we just expect grain to be easily grown in the future, like just turning on a tap,...
Is the climate stable enough to assure production as we have been used to in the past???

[TOM4CWB]

Charlie,

I see AWB offers the following program:

AWB riskassist for AWB Basis Pool
AWB riskassist is a specialised business service for growers who have an AWB Basis Pool contract.

The AWB riskassist service provides growers with professional advice that helps them to manage commodity futures and foreign exchange hedging for the AWB Basis Pool.

AWB riskassist boosts returns by giving growers access to AWB’s international grain marketing resources and expertise in risk management, combined with contract management and balanced advice.

Clients can access individual hedging strategies and up-to-the-minute news and views on the world market.

The fixed service fee covers:

brokerage for the first 14 commodity futures trades per 952 mt AWB Basis Pool contract
foreign exchange currency transactions for AWB Basis Pool
funding for hedge positions
cover for interest costs.
The service fee is deducted form AWB Basis Pool distributions.

AWB riskassist is a licensed futures broker, and is a Public Dealer Associate Participant of the Sydney Futures exchange.



Why can't the CWB get its head around the real needs of risk management, as obviously "designated area" grain producers have as much or more risk than anyone else...

The CWB could do so much more, how do we "shock" them out of the state they are in, Ontario Wheat growers have got the attention of their board, yet out here the marketing debate seems endless and futile...

If the CWB would learn to facilitate sales, instead of all the garbage about the CWB sales staff knowing everthing including where prices are headed...

The power of an orderly marketing CWB system that respected the individuals right to decide when to sell and under what conditions, could be amazing, yet the CWB seems to think that the opportunity to serve us will destroy them, WHY???

[charliep]

I don't know how durum risk for the pool from the PPO contracts is hedged. My guess would be that not a lot of durum has been contracted under fixed price contracts.

How should risk/opportunity be handled in the fixed price contracts relative to overall pool returns?