EPO, a CWB tax.

[TOM4CWB]

Charlie,

I know the CWB knew the initial price increases for some time, yet they played farmers as fools to the end... even today.

The EPO on #1CWRS 13.5 was $280/t minus the $19/t CWB risk discount... giving $261.00/t total.

Now the initial price is $263.75/t more than the EPO.

But the CWB IS KEEPING $19/t. FOR NO RISK.

I was suspicious this would happen... proof the CWB is stuffing the contiengency funds... at the farmers expence.

[winston]

Check your math. The initial for #1 13.5 is now $250.20. The EPO is $261.00. So if you do not trust the PRO's or believe they will go down, the current EPO is $11.00 ahead of the initial. It is tough decision to make when we do not know which way the PRO is going to go later this week and the last date for signing up the EPO is also later this week!

[TOM4CWB]

Winston;

You are right about my mistake... but the principal remains the same.

Without a total market meltdown, we are virtually assured that another $10/t will come...

We should be looking at a minimum of $30/t, and if a person does the EPO, then they will loose about $20/t from the payments in the future.

Obviously the risk is high that at least half of future interm pool payments will be eaten up by the EPO premium. Payments will have to go over $280/t before any more money will be recieved from the pooling accounts.

[TOM4CWB]

Winston;

USDA Portland cash prices today are:

US 1 Dark Northern Spring Wheat (with a minimum of 300 falling numbers and a
maximum of one percent total damage)

14 pct. protein mostly $5.36, ranging $5.33-5.37 up 3-2

Reporter's offers on Friday night for January shipment F.O.B. ship in
dollars per bushel:

US 2 or btr Dk Northern Spr Wheat, 14% protein $5.41 up 3

Now at today's March 03 exchange:

1.58 times $5.41 is $8.55CDN basis portland.(314/t)

I cannot see how we could possibly get back down $53/t to $261/t let alone $250.20... the initial.

So why can't we cash out sales today at $314/t? Wouldn't this make the most sense of all, but instead...

We are actually contemplating paying the CWB $19.00/t to give us $261/t!!! INSTEAD OF THE $314/T FMV THE CWB actually owes us today!

Only in Canada... sorry I meant Sovietcanuckistan

[charliep]

Interesting to bring in the Producer pricing options basis as well. The converted MGE posted Dec. futures price (http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/112502-mhrs.html) was $247.82/t yesterday (Nov. 25). Basis contracts ranged from $2.30/t over in July (price if converted to an Fixed price contract $250.12/) to $24.72/t over (price if converted - $273.72/t).

Another interesting tidbit is the observation that the initial payment now sits at 80 % of the October PRO (likely how the recommendation went into the Federal government). Winston's observation is quite correct - a lot depends on how far the PRO drops on Thurs. As the strike price drops, the premium should come down but a likely scenario is the initial payment and the EPO will be virtually the same.

Another year when anyone who used the CWB pricing alternatives was at the bleeding edge of CWB program development. The current programs are simply unworkable. Hopefully over the next year the CWB can either work today daily pricing/a minimum price contract or allow pricing outside the pooling system (perhaps allowing access to no cost export licenses).

[winston]

Another way to look at it is that the new interim of $250 is the lowest you will be paid. If you take the EPO of $261 it becomes the lowest (and highest most likely) you will be paid.

Given the prices you calulated the PRO should not go down much and we are better off not paying the $19 EPO tax!

[TOM4CWB]

Winston;

What we do need to know to finish this calculation... is to know the percentage of the pool priced, and the weighted average of the pool pricings.

If we knew this information then we could make an informed decision on what to do.

But the CWB/gov. of Canada does not want us to know this info...

Obviously the CDN. finance Dept. knows... so one would assume there is still at least $30/t of payments to come... or the initial prices would not have been raised this high this early.

[charliep]

Would agree with your analysis Winston. The only other reason for an EPO is cash flow and for $11/t, it isn't worthwhile.

A better strategy is to sell into the normal CWB pool and if you are optimistic about wheat prices, look at buying US wheat calls (use the $15 to $21/t premium that you would have bought the EPO with). I wouldn't buy all the calls in one go but buy cheaper at higher strike price/spread purchases through the winter.

An interesting thought is that the EPO trades like a put. Puts are traded off an underlying futures contract. In the case of the EPO, your premium is based off the prices of US wheat options markets but the strike prices are based off the CWB PRO. An experience of this last year (and previous) is this relationship isn't very tight - they don't always move together. Much of this relates to having a yearly average price related to a daily spot price.