FX in grain marketing

[SASKFARMER3]

That's a good explanation now here is one back.
Why did Winnipeg fail. Why not make the grain companies use a price point we could all work off of.
Why the move to USA point.
Its easy one I'm seeing get the hell out of growing any wheat and giving it to the grain companies then.
Go with another cereal.
Kind of fun to drop HRS.
AH farming.
Their is an answer for every thing why we have to pay.
Ah shit I dropped the soap.
Ouch!

[Kodiak]

Thanks John. This forum needed that explanation.
Those wanting to reinforce the fact they are able to erupt and take cheap shots, will do just that. But the shots won't add any light to the discussion, just smoke.
But be assured the majority will read your posts enough times to understand what you are saying.
I know that for me your step by step explanation filled in some gaps in my understanding. The ranting that's gone on here for months sure didn't!
I appreciate your effort John - and the fact you have thick skin

[bucket]

Principle 1 thru 4 are all about buying wheat.


Take it a step further and make the cdn graincos the seller to the international end user buying grain.

It seems the graincos have nothing to say about that process. And that's because the farmers paid their fx risk up front.

[jdepape]

Principles 1 through 4 relate to <b>TRADING</b> wheat - buying and selling.

[boarderbloke]

The FX risk is in the futures price! As the USD has increased in value vs. other currencies around the globe, Futures prices of grains based in U.S. exchanges have dropped! Look at wheat, corn and beans!
Countries around the world have said to the USA exchanges, "No, we are not giving you more of our currency(what ever it might be) for a bushel of wheat or corn or beans! We're going to give you the same amount of "our currency" for the same bushel." When that happens, a bushel is sold for fewer USD's, the result being a drop in futures price at the exchanges.
Without any "event" to substantially change the intrinsic value of these grain commodities, US futures prices will drop, they have to, in order to stay competitive in a global market place, that's the open market at work.
The way I see it, the exchange risk IS IN the futures price, not the basis.

[jdepape]

boarderbloke:

you're absolutely right - when the USD strengthens against other currencies - as it is now - it pressures US futures markets.

But because we are trading in Canada in CAD, the result of that is simply flat price risk - US futures are pushed lower.

There is price risk, but when you're hedging your Canadian wheat program, it's not an FX (CAD/USD) risk that you need to hedge - it's flat price risk.

If you were a wheat trader (not a farmer), how would you hedge that?

[fjlip]

CAD relative to USD is at $0.80, but what is CAD relative to our other markets? Has that changed? As Boarder says the buyers will NOT pay more so futures drop to find buyers. I'd guess grain sold to USA might increase in value but maybe not else where.

[bucket]

Canada's dollar should have had us cleaned out pretty quick in wheat.

Sadly our transportation system won't allow it to happen.

[Kodiak]

Boarder and John. Aren't you both right? As a seller, a change in fx (relative to $US) changes the price I receive in CAD, if I'm unhedged. And as a Canadian wheat trader, the principles John outlined leave him covered and hedged.

[jdepape]

fjlip:

We tend to look at the USD in CAD terms. But what if the USD is strong against the Yen too? (which it is)

We can say our prices (in CAD) should be higher, but to the Japanese, the prices (in Yen) are also looking higher, which rations demand - and pressures prices in Japan, meaning our prices will also be pressured.

The flip side of that is that we compete with the US so as their prices move higher to Japan, we have room as well.

[boarderbloke]

John, if you were "long" wheat, you'd have to hedge against the USD. If the USD rises wheat futures are gonna drop,(all other market factors holding the same)
That's why currency risk in tied to futures, not basis.

John, imagine for a moment that Canada had grain exchanges for wheats, corn and beans, just as the USA has. Imagine they have the same size of volume and activity as those in the USA currently have. And imagine that Canadian farmers and Canadian graincos used them, just like Americans use those exchanges in the USA.
Now imagine the CND is at $0.80 USD. That would mean that the wheat, corn and beans on those Canadian futures exchange, would be 25% higher than on the USA exchanges. There would be no reason for any difference in basis with a par CND or an $0.80 CND. Even if wheat dropped on the US exchanges, the currency difference(25%) would still show up in the Canadian exchanges, and would be considered a price premium for Canadian farmers. That premium would allow Canadian farmers in return, to buy, say US made fertilizer or equipment and have similar purchasing power that the US farmer would. Essentially, we'd be paid the same for a bushel of wheat on the futures. The "basis" that would and should represent, graincos handling costs, shipping costs, and graincos profit, would all be different based on the location you delivered the grain. Currency exchange would be no part of basis.

[wilagro]

Seems to me we used to just grow grain and let the CWB do the math.
Now every farmer has to be a friggin' trader, banker, speculator, financial wizard, trucker, hedger, bookkeeper, politician, lawyer, policeman, communicator and sometimes even a husband/wife and neighbour.