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.

[chaffmeister]

Steve:

I didn’t miss what you were saying about marketing choice. I just chose to help clarify a few things about markets in general. And we agree on most of it – farmers don’t need to trade futures directly; they can market grain quite effectively without a futures order; GPOs are just one way of doing this. From what you were writing, it appeared to me that you thought GPOs were somehow unique and not connected with the volatility of the futures markets. Perhaps I was wrong - clearly they are and I see now that we agree on that.

Also, you thought basis contracts gave the upper hand to the buyer (or the market) by having un-priced grain on the market and it appeared that you thought that this was not the case with GPOs. My point was that GPOs give the buyers much more market intelligence that basis contracts. So I’m suggesting - don’t be afraid of basis contracts for that reason, but be wary of GPOs for that reason.

Let me give an example. For many years, Japanese importers would buy canola on basis contracts, to be priced some time prior to shipment – much like basis contracts with farmers (but these are purchase contracts, not sales contracts). Some time, prior to shipment these Japanese importers would contact the exporter and give pricing orders to price the shipment. Basically, these orders would be the equivalent of saying something like, “buy 250 Jan canola at $390.00’ (this would price 5,000 tonnes of canola). The exporter would then be expected to buy futures at this price and provide a cash price based on this futures price. (The only reason the exporter would buy futures in this scenario is to remain hedged – if it didn’t want to be hedged and the futures went to $390, the exporter had the option to simply advise the Japanese importer that their contract is priced at $390 (and the exporter is now “short” at $390.) These orders (and GPOs) are not futures orders – they’re pricing orders. They are only filled when the futures price is met or exceeded, but futures don’t need to be bought or sold by the grain company in order to fill the pricing order.

But here’s what the Japanese figured out. When an exporter knows that they have a pricing order at $390, there is nothing stopping that company from stepping in front of that order and buying futures at $390.20 for itself. If it does, and the price never goes lower and actually moves higher, two things happen: (1) the Japanese pricing order is not filled and (2) the exporter has the opportunity to grab a tidy little speculating profit. If the price moves lower, the exporter prices the Japanese contract at $390, losing $0.20 a tonne on a spec position. The pricing order gives the exporter a backstop, limiting its risk substantially on a spec position .

The typical approach Japanese importers now take on unpriced contracts is to buy futures when they want through an independent broker and when time comes to price, they exchange futures with the exporter. (Using the example above, they would say to the exporter, “we will give up 250 Jan canola at $390 to price purchase contract X”. The exporter has no option but to take the futures and price the contract at $390.)

GPOs can benefit the grain company the same way. If they get a lot of GPOs at or near a particular price, they can front run these orders too, this time by selling in front of them. In this way, GPOs give grain companies a backstop limiting their risk on spec positions the same way as the Japanese pricing orders.

GPOs are a good way to park a pricing order and, yes, they do work. I’m just advising to be aware of the implications. A reasonable alternative is to pick a price (as you would with a GPO anyway) and when a grain company offers that price, take it. The downside of this is that you need to be more vigilant.

[kslseed]

bmj128, Yes, my brooker told me to use corn because it trades more.
Also, he thought that by may 03 we should be around U$3.50/BSH.

[reddd]

If the CWB is supposed to protect us from risk......What protects us from the CWB ?

Dwayne Leslie
http://www.farmauctionguide.com

[Steve]

Chaffmeister


I think we both agree that the farmer has some marketing choice and will sell if the price is right, so why are you saying that there is more risk in GPO’s than waiting for the market price to hit the same target and then sell.

I did both, but prefer the GPO, because you don’t miss your target price when there is a short rally in the market; also as you know farmers have a tendency to change their mind in a rising market and end up selling in a panic downward slide below the initial target.

I understand the bases contracts and have used them, but I still don’t like to have un-priced grain committed to a grain buyer.

GPO is also a commitment and can be easily canceled with no cost to the producer, but not so for a bases contract.

I had a bases contract for canola with Agricore and on the deliver day they offered me $7.00 a bushel and UGG ‘s price was $7.25 a bushel, so there goes my good deal and the bad part was I had to haul right by UGG to get to Agricore.
In many cases the grain buyers will match the price without the bases contract for good customers.

[chaffmeister]

Steve:
I am not saying that there is more risk in GPO’s than waiting for the market price. I appreciate your reasons for liking GPO’s – I just think that you need to be aware of what the grain company can do with that contract that benefits the company at your expense. I hope my example was clear – if not, please let me know.

When you refer to a basis contract and un-priced grain, do you lock in a basis or is it just un-priced grain (on free storage – we used to call it 90-day deferred pricing). There is a huge difference. Both contracts tie you to one company but un-priced grain (with no basis locked in), in my view, should NEVER be used.

With a basis contract you have locked in a basis only - the contract is to be priced later at “the market”. Pricing could take place on the delivery day. I’m sure you’re aware that basis levels fluctuate. (Why else would you bother locking in your basis with a contract?) The fact that your contract may be lower on delivery day than the street price should not be a surprise, nor a great concern, nor a reason to dislike basis contracts in general. Your contract price could be lower for a couple of reasons (1) the basis on the contract was not as good as the spot basis and/or (2) the contract was priced when the market was lower than on delivery day. But you made those decisions (basis and pricing) freely and based on sound marketing concepts (perhaps even a GPO to price the contract). By the same factors, your price could be higher than the spot price on delivery day.

What about your GPO’s – did you ever get a pricing on a GPO that was lower than the street price by the time you delivered it?

Deferred pricing contracts were developed because farmers wanted to deliver grain without pricing it and the CGC allowed this to happen with the limitation that the grain had to be priced within 90 days; in the mean time it would not accrue any storage. So grain would be delivered, sold to the grain company for a nominal $$ amount – AND NO PRICE ATTACHED, NOT EVEN A BASIS. What this did is give the grain to the grain company with the trust that the price later on would be fair market value. Here’s the problem with this. Price tends to be based on supply and demand – the less available, the higher the price. The power the farmer has in the market is expressed through holding his grain off the market (over the short term anyway – less than a crop year). When farmers deliver grain off the combine and sell on a deferred pricing contract, they have just satisfied the demand. There is no incentive for the market to bid the price higher to get the grain - it already has it.

Most of this grain was left to be priced on the last day – 90 days after delivery. Every grain company has computer reports that advise the traders when this grain is coming due and will need to be priced. When the grain is to be priced (futures sold) the companies will know exactly how much ahead of time. On top of that, these contracts are often priced at the current street price. There is no incentive to provide a “good” street price. What developed was a two-price system on canola – a street price (for deferred pricing contracts) and a more aggressive bid for new deliveries (with a better basis).

Anybody still selling on these deferred pricing contracts?