CWB hedging?

[rain]

Charlie do you have any idea how the CWB would do its hedging? I may not be thinking clearly and correct me if I am off base.
If a grain seller sells wheat but does not have the grain yet he would get long. sold wheat-buys wheat futures.

If the seller buys wheat from the producer he sells the futures? buys wheat-sells futures.

Could you go through these scenarios for me?

Thanks

[charliep]

From my knowledge, the CWB does not hedge the way you describe here - use to establish an offsetting position in the futures versus what they have in the cash side. They use it as a enhancement to their cash sales (use to offset/establish a price for a basis contract) and to manage the risk in the producer pricing options.

This is one of the biggest questions being asked in this discussion area. I don't want to know day to day sales/hedging activities but it would have a better understanding of approach and pre-determined/agreed on measures of success.

[charliep]

I left out some words. this is what I meant.

This is one of the biggest questions being asked in this discussion area. I don't want to know day to day sales/hedging activities but it would "be nice to" to have a better understanding of approach and pre-determined/agreed on measures of success.

[rain]

The scenarios I explained are they the way a grain company would hedge?

[charliep]

Yes. The objective of a grain company is to manage risk/solidify margins. They have no stake/reason to care whether prices are high or low.

The CWB runs their business almost the same way a farmer does (I was going to call them the worlds largest farmer but this is border line inappropriate). They believe they can obtain the best prices by selling at the right time and at the best price. They also average out sales during the year.

An interesting question would be what a successfull CWB hedging program would look like?

[TOM4CWB]

Charlie;

Correct me if I am wrong:

I have had conversations with the CWB risk management people, and if the CWB sells wheat, then it is usually on a supply agreement (priced basis) , and they usually do not buy the futures back... cause they simply would not have made the outright sale if the CWB didn't like the price when the agreement was made.

Now in the past 2-3 years I understand they are going short the futures, (with significantly less direct pre-pricing with customers) when the CWB thinks a major downtrend in the market is going to happen.

What Rain brought up, the CWB going long after pre-pricing or hedging, is what the CWB used to do when the Commissioners ran the Board. Then the long position would be lifted when the cargo was loaded at port. This matched the daily sales values with the volumes that were delivered and gave accurate pool results... a real average for the year of sales made throughout the year... even if customers all wanted to buy the same month or quarter.

This is why the 1995-96 wheat crop pool went up so much, cause the CWB had high sales values from March to October of 1996 to go into the 1995-96 pool accounts. Then the 1996-97 crop year didn't have any sales of high priced grain... cause the high sales values already went into the 1995-96 pool.

What the CWB explained this spring at the accountability meeting at Stettler, was that the old principal of managing futures to create the daily sales throughout the pool year has been dropped, because CWB intelligence, weather forecasting, and expert sales knowledge made the old daily sales system outdated and less profitable.

As Rain suggested a prudent marketer would already be long (IF THEY WERE GOOD RISK MANAGERS)…

As emotion and weather events make markets chaos that is not at all predicable… even for the “Superstar Marketers” of the world… as they get humbled like everyone else when they look in the mirror after market events like this summer….

Then in the recent past when the CWB found supplies were shrinking enough that they possibly didn't have enough grain to cover pre-priced 2002-03 sales...

The CWB felt compelled to go long the futures if they were not already long against pre-priced 2002/03 sales, or if they were short the market since early summer… then the CWB would buy back the short positions… at the 1.00-1.50/bu loss that AdamSmith was talking about.

Now Charlie what is a prudent marketing plan?


When we all jumped all over the CWB in late June 02, (cause the PRO indicated a lack of responsible marketing) wouldn’t a prudent marketer have changed its marketing plan to accommodate the farmers reality… as it was clear Canola was being bought back all over the place in the 2nd and 3rd weeks of June…

Didn’t the CWB have an obligation to "designated area" farmers to buy back the 02/03 grain they had sold at that time (mid to late June)as well????

[charliep]

Too many questions.

My experience in the past was that most sales (exception basis contracts) are priced out at the signing of a contract with a buyer. No knowledge of current practice.

Under the old CWB act, my understanding speculating by the CWB was strictly forbidden - going long futures when the CWB was already long lots of grain. Can't comment on the current act. I might highlight adding to longs in here as a risk manager is likely not a prudent decision (if you are a disciplined speculator with money you are willing to risk, maybe a different story).

Your comments about matching delivery commitments with CWB hedging is relevent. Any CWB hedging program that occurs in the spring happens without any delivery/sales commitment by farmers is questionable.

Again the question comes back to what a successfull CWB hedging program would look like. I can answer for an individual farm manager/grain company but I am not so sure I know mayself from the CWB side.

[rain]

Tom

What do you think does the board short the farmer in there hedge. Do they sell grain they already have in the system. Or are they selling what they do not own yet, and assume they get the grain.

If they are long after selling, things are not so bad they are selling into a upward market and hopefully can average all the way up. But if they have shorted the producer the PRO and prices could be ugly yet.

It is really easey to be cynical about the CWB ability to do anything correctly. If they are selling into an upward trending market that is there job.

It is too bad that we won't know what has happened for a long time, or if we will eve know.

Tom are you going to hedge next years wheat yet?

[charliep]

After reading my stuff, I think I need to go back to school. Pretty hard to use hedging as grain producer (or the CWB as an agent)/being long futures in the same sentence.

[AdamSmith]

I also posted this on CWRS thread.

This is a passage from the AgResource Daily Wheat Anaylsis Thurs. Sept.5.

"The CWB has been rumored to be large buyers of wheat futures in recent days covering long held short positions."

(This came off a fax copy so I couldn't cut and paste)

AgResource is a highly reputable grain market advisory service out of the United States. The real Wayne Gretzky of marketing.

[TOM4CWB]

Charlie;

If the CWB pre-priced sales of the 2002/03 pool, then they need to be long till the actual grain is delivered to the customer.

An example I work with is Canola I pre-sold this spring for Crop Share Landlords.

My policy has always been, if I pre-sell unharvested grain that is crop share, I either have personal knowlege and heart felt approval for the pre-sold grain, or I don't price it.

Now this spring I bought back calls on the pre-sold grain that was not harvested... to insure my crop share Landlords got market price this fall...

Otherwise I might not be farming with these people next year....

And doesn't that about say it all???

How could the CWB sell grain they don't have permission to sell, and don't even know if anyone will deliver this year at all......???

Rain;

I am afraid that selling any of next years crop is premature... the risk of the pre-sale is creating is finacially more destabilising than not selling.

The risk reward has to be really positive to the extreme... when conditions have turned so much against production, plus the CWB lack of transparent cash pricing stops a short futures position from paying back the futures loss....

CWB risk on basis has turned out to be close to the futures risk... so I refuse to do any basis I can't assure delivery on...

[TOM4CWB]

Rain;

That comment on the short position didn't quite come out right.

I must have a transparent market that if I am short (or have sold), then if my futures position has lost a dollar a bushel (because the futures went up a dollar), that I can get the dollar a bushel back when I sell the cash grain.

Rain the only way that I have any inkling at all on CWB risk management positions, is the PRO (how slow it reacts to market increases) or info that has been provided to me or those I have a close relationship with that work on these risk management issues.

In July, the CWB was specifically told that they must set up a risk management group to get valid input on marketing strategy... cause I am sorry, but the majority of the CWB directors are cow-calf cattle people (and, or, have sold their soul to the pooling accounts) and don't have a clue about the real commercial world of grain merchandising.

This is why the CWB MUST become a facilitator of grain sales FOR "designated area" grain producers, rather than being responsible for "pulling the pricing trigger" on our grain.

Setting up a risk management group has real commercial confidentiality problems, so will likely never come to pass,.....

therefore only farmers can be responsible for pre-selling grain, in turn allowing the CWB to pre-sell the pre-sold... otherwise the CWB is confiscating the grain through expropriation, which is against the law in a free and democratic society.

The pool MUST be a pool, of the whole marketing year(sales timing wise), or the whole benefit of pooling is completely lost... as no-one can know what the future will bring and the CWB won't pay up for a bad decision.