FX in grain marketing

[SASKFARMER3]

Your funny now just keep telling us how well the system works in Canada.
Also a answer on how margins that once sat at 25 to 35 a ton for grain companies suddenly are in the 90 to 125 range.
Hm must be working real good not in the Basis at all.
Again in USA shit like we have in Canada would not be taken.
Answer that. Would a USA company try the same shit that's happening in Canada not get sent to Washington to explain.
But here guys like you to tell us all how well it is out in LA LA land.
Calling my flight Later.

[poorboy]

Biggest problem including Fx in basis is that it makes it very hard to lock in the futures and basis at different times.

If grain companies are taking positions in both wheat futures and cdn dollar futures there is no need to hide Fx in basis. The rest of the grain companies expenses are in Canadian dollars.

Futures prices on wheat should be converted to Canadian dollars on all quotes and contracts.

[Jay-mo]

One of my local elevators puts the FX into the basis.
I sign X-amount tonnes of cwrs #2 13.5 on basis contract at 19/t. that's roughly $.52/bushel.
The FX is now locked in.
I can watch Mpls futures as Cd.$
Today would net me around $6.30 cd.
It still doesn't separate the FX from what we consider to be "basis, but I can live with that.

[bucket]

1. 300 usd per tonne is 10.25 cdn per bushel.

2. Currently the bid in mid point sask is 5.75 per bushel cdn.

3. Just call the basis a minus 1.60 a bushel. It is.

4. What risk are you taking at buying at 5.75 and selling for 10.25?

when you start delivering grain as a profession you might notice you pick up a grain check and the grain isn't in a rail car but it's deducted. Too me that prepaid freight. Get it. They don't send me an invoice after the grain to vancouver.



What components make up the basis? Freight elevation inspection?

[Braveheart]

SF3, that ND basis price is for 14% pro, 13.5 mois wheat. Today, in SK, you couldn't have a target hit for those specs at that price?

[Braveheart]

I'm in Jay-mo's area and $6.30 was available today. A few targets were hit higher.

[jdepape]

bucket:

Not a very sincere attempt at it, now was it?

"What components make up the basis? Freight elevation inspection?"

That's your answer? You can't be serious. This is big part of your livelihood and that's the best you can do? You gripe all day long about how the graincos are ripping you off by leaving the FX out of the price - yet you don't even know what goes into the price in the first place. Are you kidding me?

You know, this is serious business. I'm not playing games here, but with your lack of sincerity, it appears you are.

I got an email from a friend earlier this evening and after reading this thread he wrote:

Some people just want to complain. You can’t help a guy who is proud of his ignorance.

I guess he's right.

[MBgrower]

Not much need for grain cos to hedge futures when there is $80-100 per tonne margins made.

[TOM4CWB]

Dear John,

Thanks for taking the time to lay out the risk involved in our grain transactions.

Another BIG risk... is that a sale is on the books... the ship is in port... and the grain is 2 months late in getting to port to fill the ship. Basis risk no doubt... and if the grainco needs revenue to offset the losses... the next set of sales needs to pay for previous losses.

The CWB pools used to absorb these risks, now the grainco's must do a basis adjustment ... often after the fact.

This interruption risk was big in the past 2 years. If an enduser was getting wheat 2 months late... what do they feed their plant with... thin air?

When we cannot supply on time on spec... there is a huge cost end users must bid into the Canadian price.

Good job on FX John... Thanks!

Cheers!

[SASKFARMER3]

Oh my god Tom woke up. Cheers to You!

Dep its nice you have one friend out West that emails you saying that all Western Farmers do is Complain Darn Head of Grain company emailing where to drop off your goodie bag.
Please answer the one question the 100 plus emails I received asked why wont he answer the question.
If margins for grain companies moved from 25 - 35 and now are in the 90 to 125 ton range where is this money coming from. That's a real question. Simple really the shit show in Transportation that happened last winter was the Catalyst to create this environment. Blame the railways and the grain companies made out like bandits.
Now it just continues.
Simple question why have their margins increase so so much.
Where did this come from?
You know the answer so do the rest of us just say it.

You know it really pisses me off I'm reading in the paper here how the influx of tourists and drought have caused a shortage of pineapples and now all have to pay more.
Ah supply and demand.

Plane change! Have a great day.

Ah farming!

[Nudge]

A few more thoughts and John please correct me if I'm wrong. It is understood that basis and futures should be separated into two pricing components. The basis is what the grainco's use to give producers an indication of there need for grain (for lack of a better description) When FX is tied to basis those two become muddled. Sure basis has improved recently but likely due to currency, how do i know when the other factors that affect basis are at play? I suppose if basis changes by more than currency?

Is it not true that the only difference for the grainco to report basis ex currency is to lift the currency hedge that goes with long futures position from your example above, at the time producer locks in futures portion and not basis portion?

in above example it is my understanding that the grainco would take a short CDN$ position equal to the value of the long wheat position. As it is today the grainco would lift that currency hedge when producer locks in basis because at this point they have offset FX risk to the producer. Grainco getting paid US$ and hedged in a US$ market and currency risk of acquisition of commodity has been moved to producer. The long wheat position would get lifted as producer locks in futures portion.

Again I ask why can't the grainco lift currency hedge at time of futures lock in and therefore quote basis ex currency?

Sorry if that is hard to follow!

[bucket]

Depape

The components of basis was a question.

They are not clearly defined.

The first three are obvious. Add in demurage that isn't a farmers cost and then what?

Futures minus cash?

And where do they start the calculation? From the ports or the exchange?

My point is its not clearly defined. In Canada it's a made up number agreed upon at a tea.

[sawfly]

thank you tom for stating the obvious
about our transportation system.
and the 1$ a bushel disadvantage producers in this country face because of it..
amongst all the other disadvantages that our federal govt.feels like throwing our way. ( we all know the list)

it is also obvious that nothing has been fixed. the 2 cent fine the RRs
got for last year produced the expected results. none

where , where ? is our govt?
the BS the govt. puts out that they want a market solution.
how will that happen when parties involved are making out like bandits.
why would they want to fix it?

the 100-150 grand i lost last year to this mess, is huge to me.
the 150 grand fine is zero to the rr.s

make the grain co.s switch stocks at port. so the ships can get loaded and on their way.
or is is it that this govt. has gutted the grading system so bad that they can not guarantee what is loaded.

you got the open market you wanted ,
the least this govt could do is help it function. manage something please .

do you think for one minute the US govt. would let one or two private corporations control the Mississippi.
and strangle hold their primary producers.
No they are not that stupid.

but here no, we think (or at least our con. govt. does) that these two outfits will sort it out for the benefit of the country.

worse than Brazil's infrastructure problems. worse than the Russian and Ukraine corruption .
we are just pathetic

where is the plan Stan?

third world here we come ,

[bucket]

Sawfly

The railways are 12000 cars behind according to another group that is monitoring it. Quorum isn't keeping up apparently.

So raitt was asked about it. And she said she is monitoring it.

In September thru December of 2013 ritz monitored it right into a crisis.

And we all know who paid for it.

Railways changed their ordering system and they are still 12000 cars behind. Ports are at 60 percent capacity and the railways missed their 650000 tonne weekly target by 100000 tonnes.

Interesting hey. More interesting is how it affects our prices.

I will maintain demurage is not a farmers cost. That's a direct result of the graincos and railway incompetence.

[jdepape]

SASKFARMER3 - You know, in another setting, you'd be considered a bully. You won't ask my sincere questions yet you insist I answer yours - even though, if you'd been paying attention, you'd know I already have.

I'll try it another way.

1. Anytime you have a capacity constraint in a value chain, market forces <b>may</b> drive prices apart. (higher price at port vs lower price inland). Question: Do we have a capacity constraint right now? If so, what is it?

2. "Capacity utilization" is an important factor in a value chain, particularly when the business has mostly fixed costs. The firms that control the capacity are in position to charge more and widen their margins when demand for that capacity is greater than the capacity. Question: Who is in a greater position to control their "capacity utilization"? Railroads or graincos?

3. The capacity of a value chain is considered to be constrained when there is more demanded of the system than it can handle. Grain sales and deliveries from farms continue at a healthy pace. Question: What role does this supply feeding the system have on capacity utilization, price and elevator margins?

4. Grain prices have a "risk factor" imbedded in them. The greater the perceived risk, the greater the "risk factor". These risk factors can be a number of things - one big one is the risk of "non-execution", characterized by things like potential demurrage, delays and penalties. Responses (by the grain trade) include reduction in forward selling, reduction in purchase price and higher selling prices. Question: Are there any perceived risks in the value chain right now that would indicate a response by the grain trade?


Problems / solutions:

<b>Problem #1</b>. RRs control their capacity and therefore they maximize their capacity utilization. It's just good business (and expected) until it impedes others and creates losses elsewhere in the value chain.

<b>Solution</b>: Whenever you regulate a monopoly, the objective is to make them act as if they were in a competitive market. Haven't seen that yet. When a RR agrees to a car order - even from a small shipper - and they fail to provide the cars in a set amount of time, the RR should pay a penalty to the shipper.

<b>Problem #2:</b> After last year, the perceived risks are huge. Graincos are operating in this high risk environment (perception is reality) and pricing accordingly.

<b>Solution:</b> Remove/reduce the perceived risks. And it all comes down to the potential of not being able to execute - so we're talking rail service.

<b>Problem #3:</b> Farmers asking too much of the system - selling and delivering more than the system needs at times. Make no mistake - price (basis) gets low because farmers keep selling. Some might say the problem is the graincos dropping the price because they can. But the only reason they can is because farmers keep selling it.

<b>Solution:</b> Knowledge and capital. Understand markets better and be equipped to avoid selling because of cash flow.


With typical victim mentality, you see bigger elevator margins than you think are reasonable and you complain. Although you think I am defending the graincos, I am just explaining the situation. I won't vilify someone who is being presented with large margins on a silver platter. (Make no mistake - placed in the same situation, you'd do it too.)

You can go on complaining if you like - it's a free country. But I choose to continue to search for solutions.