Marketing without the CWB

[Steve]

The commodities and futures market is very complex also misunderstood by most people including the farmer. Some of the reasons are:

1.We have a verity of people in the commodity market place and all try to use it too their advantage.
2. Farmers and grain companies, use it to sell their grain into the future months to secure an asking price for their grain.
3. Speculators buy and sell and are only concerned about making money.
4. Speculators work by buying and selling, futures, puts, calls options and it can be cash or commodities.
The easy way to understand this is that these speculators are betting against each other, that the price of the product is going up or down and the person that is right makes money and the other loses. .
5. There are large banks, money manager and brokerage firms involved in the commodity market that can move the market in their favor by using weather, artificial shortages and surplus on related rumors.

I don’t think that the average farmer needs this additional gamble or stress to market the way some people are suggesting.

This is one way I think a farmer can market and not saying is the only way to get a reasonable return:

Lets use GRAIN PRICING ORDERS system to sell your grain and this is done at your local grain elevator at no cost.

This is the way it works, you sell in lots throughout the year.

1. Example you want to sell a 100 tonnes of canola in the month of December for $360.00/t and it doesn’t matter what the future price is for that month. The grain company will place that order on the market free of charge and if some one buys it at that price, you must deliver and will receive your asking price.

Now if the price is too high and nobody buys before the expiry date, then you can just throw that contract away and put the same grain on another month and change the asking price if you wish.

Keep in mind that if some one offered you that price it becomes a valid contract.
or
2. You can in any given month sell on the futures the amount of your choice at the price that is offered and lock it in. Also I suggest sell in lots.

3 I don’t like to buy a bases contract, because that means you have un-priced grain on the market and the speculators will set a price for you, especially if you leave it to the last day. Also this contract is between you and the elevator company that wants to handle your grain. I have seen cases that the bases are lower in your selling month than you paid earlier. [ gamble????]

4. Now this marketing system gives you cash flow for the season.

5. A contract is a gentlemen agreement between two parties backed up by law so that the same can’t abuse each other.

6. A contract can be altered or cancelled in writing if agreed too by both parties signed and witnessed.

7. I know the above system works because I used it myself.

If the CWB becomes a choice, you can market all grains using the above method with a little help from your grain buyer.

[rain]

What happens if all you do is take a GPO and you are always too high. I my self hate GPOs. They are way overated and you still get nothing for it. Pick a price and when it gets close decide at that time. Do I need this money now. What are the market conditions today and what has changed since I set this target.

We did new crop barley back in March 15% of last years yields. $139.00 fob bin minimum price and netted $185.00 on that contract. We did the next contract $200.00 FOB bin in October

[chaffmeister]

Steve, you say that you don’t think the average farmer needs the additional gamble or stress of the futures markets to market grain. I agree - farmers don't need to trade futures directly. Let’s be clear though, your GPO idea makes extensive use of futures. In your first example, you offer 100 tonnes of canola at $360/t and you say, “it doesn’t matter what the futures price is”. Here, I disagree. The GPO will only get filled if the futures (and basis) combine to give you your $360/t. If that happens, the grain company will accept your grain on the GPO at $360 and will either sell it, hold it (spec) or hedge it.

In addition, when you put out a price on a GPO, the grain company now has that information in its “hand”. One or two small GPOs won’t give too much, but if a grain company has a fairly large book of these GPOs, that gives that grain company substantial market power through information.

On your point on basis contracts, I think you should look at it a bit differently. You don’t like basis contracts because it means “you have un-priced grain on the market and the speculators will set a price for you”. The “market” will set a price for the futures, not just the speculators. And nobody in the futures market even knows about your basis contract – except the company you sold it to and they can’t move the market on their own. Yes, the basis may move against you (lower basis than what you locked in) since basis is a reaction to the market place. Is this a gamble as you suggest? Not any more than forward pricing on a GPO. I don’t think either is a gamble if you have placed the GPO at a price you can live with (it satisfies some marketing criterion such as covers costs, etc) or lock the basis in at a level that makes sense as well. The only time marketing is a gamble is when you don’t act on sound inputs (information and counsel/advice).

It’s interesting that many see the CWB as a way to avoid the pitfalls of the commodity markets (futures markets). However, many times when the CWB sells grain in the cash markets both domestically and offshore, it exchanges futures with the buyers – this means that when they sell wheat, they accept (buy) futures from their customer. The CWB is a huge wheat futures trader and even has traded domestic barley futures (on a much smaller scale). In fact, the CWB has a “risk management” department whose purpose is to manage futures and options positions for the CWB.

[chaffmeister]

Risk Management Department is a great diversion to keep the NFU whackos from understanding what they really do.

[kslseed]

I believe all of you have correct points and it does not matter if one believes in using futures and the agony that one get's himself into at some points.

It is a matter of personal interest. But all markets in one or the other way are influenced by the long and shortterm futures, that is a reality.
I grow winter wheat, had 500 MT and sold after harvest for C$5.25 BSH. Since all in the market where more then bullish, I bought May Corn Futures for US$2.60, but a day after, corn started to go down, because the smart people giving knowledge where not as smart as we thought. Two weeks ago I sold March corn futures to level my business, same March contracts I have to buy back tomorrow and hope my own believe of higher corn prices for May hold true. If I would not like the dealing involved, I would not have done this.

What does ths mean: I put C$96,000 in my bank, but still wanted to have the inventory to get higher returns in May. Even if my May futures stay leveled, I have used $96,000 for cash with out interest as I had used my bank (about $3600 for six month).

I believe, that we have many options and I use the CWB where it fits (or where I have no other options), and use all other tools as they fit.

What is the problem, is that the bulk of todays farmers are close to retirment and can't or want use other ways then what they are use to.

[bmj182]

kslseed,
Just wondering, why did you buy corn
futures instead of buying wheat? Did
your broker recommend this? Just
curious, thanks.

bmj

[Steve]

Chaffmeister

Thanks for your comments, but it seems like you missed most of what I was trying to say about marketing choice.

One choice: GPO is not just a stab in the dark, the producer has to calculate the price he needs for the product to stay in business, and try to market part of the production at that price.

I said that it doesn’t matter what the future price is for that month ( GPO month ).

Grain buyers ( speculators ) may pick it up in a rising market or to fill a commitment if they are short. This is one way a producer can try and get a better price for some of his production, but be realistic and I know it works.

All the participants in the commodity market place are involved in setting a price for commodities, sellers have a asking price and buyers use offers ( GPO is part of that)
I don’t care how the CWB markets grain, but how we can use the commodity futures marketing in a simplified way.

Another choice I said; Sell into the futures market if the price is right in any given month or the days offered price. I didn’t say not to use the futures commodity market.

Your need for cash flow, will in most cases have a big influence on how you market.

Rain;
You asked “ what happens if all you do is take a GPO and are always to high”

My answer is, try a realistic price and it will not be to high, GPO is just like you name, if it doesn’t rain today it may do so next week.

You also said, “pick a price that you want and sell went the market hits it”

That is what a GPO is about, your grain will be sold when the market hits your asking price. Good marketing management is to sell in lots throughout the year.

[Steve]

Kslseed,

Your statement “ what is the problem is that the bulk of today’s farmers are chose to retirement and can’t or don’t want to use other ways than they are use to.”

Marketing should be a farmer’s choice, but I know a few young farmers that got too smart on the buy and sell in the commodity market and they are not farmers anymore.

All I will say is that the commodity marketplace can be cruel even to an experience player.

[TOM4CWB]

Steve;

I know a few young farmers who borrowed money... bought farm land... spent on "value adding" farm assets... who are not farming either.

The fact is that this is a brutal business... that has high risk... and astute risk management is the key to a profitable farm today... no matter what the production from the farm.

The CWB has refused to allow reasonable risk management... and will pay the price for policy decisions that do not respect property rights... and promote communist theory. WE all know how well communism works... the folks in Russia are still paying a huge price for a history of state intervention...

Goodale/Chretien have a choice... to cause the CWB to respect the individual's right to property... or to continue destroying the CWB...

[Steve]

Tom4cwb

I think the CWB should be a farmer’s choice and not have a monopoly on marketing, but I don’t believe the board is the cause for farmers going broke. Wheat and barley is just part of a farmers production so it’s not fair to say that the CWB destroys our risk management.

The CWB does some risk managing for farmers by pooling wheat and barley. ???????

The farmers are going broke because of; unreasonable high debt load, low grain prices due to world competition, Mother Nature being unkind and poor management. It’s up to producers to do risk management not the CWB or grain buyers.

So lets change the CWB to be a choice and not our risk manager.