FX in grain marketing

[charliep]

I will leave this discussion alone other than to support John's ideas. The processes around managing risk between farm purchases, sales to end use customers and logistics is a very complicated process. The process at the end of the day is very mechanical/based on procedures. Was going to go into a long explanation but would bore everyone to pieces. I can still remember the guy at UGG 20 years who walked around every with the companies exact risk position on the cash side - inventory, contracts, sales, futures. The objective was to make margin. A lot of making margin was managing risk with the caveat risk is both protecting against pain but also giving up gain.

Can't explain why grain companies post basis the way they do. Can't tell you whether they are making excess profits except they are likely doing well. Don't know what more regulation would do other than adding another layer of complexity/inefficiency into the supply chain. The answers I think lie in the supply itself in terms of better communication/coordination.

[fjlip]

Certainly next to ZERO time for neighbors in this area, Wilagro.
I vote boarder for Finance or Ag minister to fix this shit show! Like your math.

[stonepicker]

And that's why some people loved the cwb., because they don't wanna learn about marketing and they don't wanna see their neighbor get more than them for a bushel of wht.,every other industry in the world has had to get up to speed to be competitive in the 21st century, why not farmers too. But some continually want to stick their head in the sand and hope for the best. ( and complain about it )

[ProFarmer]

There she blows! Market is looking for wheat to cover positions. As in all commodities.Last kick at profitable marketing be the US goes broke??????

[jdepape]

boarderbroke:

If you were "long" wheat <b>as a speculator</b>, you <b>COULD</b> hedge against the USD - if you wanted to be long wheat net of any currency effect. But <b>as a hedger/trader</b> you wouldn't.

Say your short Mpls futures as a hedge against cash grain you've bought in CAD. If the futures drop because of a strong USD, the market you are selling into will also drop accordingly - all else being equal. You're fine with that - you offer to sell the cash grain you own at the lower cash prices and you lift your hedge - which worked to protect you from the drop in price.

But let's say you hedge the USD impact on the futures as you suggest.

Since you are short futures, you are at risk that the USD will weaken and provide support to futures, possibly pushing them higher. This is the risk you want to protect against - so you sell USD (USD index? USD/CAD pair? Not sure what you would sell.)

Now let's say the USD surges higher - you lose in your FX account, and your wheat futures are kept lower (but only maybe - there are many other factors pushing wheat prices).

Now you go to sell your cash wheat in USD and the price is - all else being equal or unchanged - a bit lower, in line with the lower futures.

You sell your cash, lift your futures hedge and lift your USD FX hedge. Everything worked as it should - except you have a loss in your USD FX account and you have nothing else to compensate it with.


Re your "imaginary" market with Canadian (CAD) futures. I agree that - all else being equal (or unchanged) - the CAD futures and the USD futures for the identical commodity should reflect the current FX rate. Just like IBM stocks in NY and TO differ only by the FX rate.

But the underlying commodities would have to be identical, which is not likely.

And after all that, it is just theoretical, isn't it? We don't have those CAD futures to absorb the FX, and since the US futures don't (for a hedger/trader), it has to be in the basis.

[katoe]

Interesting every time the grain companies get beat up for too long its John Depape to the rescue for them . Funny they never defend themselves.

[SASKFARMER3]

Because his check is in the mail and that board seat is opening up! Ritz is passing he wants some foreign position!

[bucket]

A grainco rep hired by the government to explain their formulas.


Great hey?

[stonepicker]

Wow, a very knowledgeable guy comes on here and takes the time to explain the grain markets so people will have more knowledge on the subject, and you guys do your best to discredit him. But then again these are the same guys that think bto is a great read.Pretty soon there will be only whiner's and such on here. My glass is still half full.

[SASKFARMER3]

Stone you ever think that some on here also took marketing at a university! It was a nice explanation! But like Charlie said he doesn't want to say how much their making! Dah follow the money!
Join the real group and be a realist! The glass is half full will eventually go rancid!

[boarderbloke]

boarderbroke: ...com'on John! lol

seriously John, I'm glad you agreed and added the IBM point.

Re your "imaginary" market with Canadian (CAD) futures. I agree that - all else being equal (or unchanged) - the CAD futures and the USD futures for the identical commodity should reflect the current FX rate. Just like IBM stocks in NY and TO differ only by the FX rate.

Let me ask you John,,,when you're in your Canadian stock brokers office, and you sell the 100 shares of POT-NYSE from your account at $37.33USD. Would you be cool with you broker putting $37.33CND/share in your pocket?

I'm sure you wouldn't tell me that the exchange should go to your broker, along with his other costs(basis). I would think rather, you'd want to end up with $37.33 plus the exchange, which would be closer to the $46.25 that the same shares pay on the TSX trade at.

Canadian farmers are saying the same thing should be reflected in grain prices.

Had to use POT as I couldn't find IBM on the TSX.

Regarding grain, what this comes down to is, the graincos want the fx and farmers(atleast those that are aware) want the fx.

In my opinion, the method the graincos are currently using to display their grain prices is unethical and fraudulent. The strategy is being used to deceive farmers. We all know it because it wasn't all that long ago people were posting on here about pricing grain at zero basis or close to zero basis, completely NOT ACCOUNTING for currency exchange. Suckers!

[farming101]

Thanks for all comments on this thread lots to think about.

Imaginary markets are one thing.

Real markets are an altogether different animal.
One only has to study what went wrong with the US oat market last winter to realize that Canadian markets and US markets are not the same by a long shot. Futures markets can at times eat their participants for lunch. With oats it was not just new producer sales that could not be made to capture the price increase; there were many with bona fide sales on the books that were not able to deliver their oats in a timely manner and keep a lid on the futures market. There were other factors at work too but one definitely was low stocks of oats in store in the delivery area.

One poster on NAT refers to the Minneapolis wheat exchange as the Thunderdome. Two men in, one man out.
As far as price discovery, some have argued and rightly so that some exchanges have ceased to function as a proper price discovery tool. Lack of convergence, meaning the contract will go off the board, all positions retired, with the resulting 'price' not the same as actual cash prices in the delivery area.

Not saying that farmers should avoid forward pricing and using exchanges or other tools to capture future gains in the market and thereby improve profitability, but at the same time everyone should be well aware of what it feels like to tell the banker you need some more margin money, only to realize you cannot make your margin money back by selling the actual grain.