Security on Grain Sales/ WHY/

[TOM4CWB]

Charlie and Lee,

This was on my 'Callum Downs' Newsletter this week:

actually being offered for canola are now well above $850/t
with some buyers, but not all.

With canola in particular, but
also with other grains, be wary of the very best price on
offer if it is way above anyone else. Why would it be?

Is that buyer already committed to an export sale and is yet to
buy grain to cover that sale? If they are short and the
market has moved up a couple of hundred dollars a tonne
are they financially sound enough to be able to absorb that
loss?

They are just questions to pose as a warning that if you take
the best price on the day that looks too good to be true, you
could be taking a larger risk than taking a slightly lower
price.

We have seen out of control canola trading take down grain
marketers before. With both wheat and canola prices going
ballistic expect some traders to get it wrong and have to
absorb large losses.

In all grain marketing only sell to buyers in whom you
have some confidence, and do not just necessarily chase
the highest price on offer. The highest price on offer is
likely to be the most risky price as well."

Is this the time to deregulate grain Security in the 'designated area'?

How many growers must lose their farms...?

We have Security on Farm Machinery, Auction Marts, Car Dealerships...

Banks... imagine that... needing security on deposits at our banks!

How absurd!

Why would we need some kind of a mandatory security system for our grain... to have reasonable assurance we will get paid?

Why exactly should this be different that the money we hold on deposit at our favorite bank?

[melvill]

Interesting, Tom. I don't know that it has happened in W. Canada recently but there are anedodal (sp?) of U.S. elevators (primarily producer-owned) in fairly big trouble because they haven't been able to make their margin calls on their hedged inventory. Of course, those elevator's lending institutions have put on the brakes. Now about Canadian graincos caught because of a shortage of operating money for margin cals or short cash inventory for previous sales, I haven't heard . . . .

Anyone else heard any scuttlebutt in this area?

Parsley, wanna correct my spelling . . . ?

[bduke]

Melvill..I've heard that US buyers have been suspending HTA (hedged to arrive) contracts for the reasons you have mentioned. Source is farmers who often use them....not anecdotal...Bill

[parsley]

No, as fransisco's uniion will not allow me.

[TOM4CWB]

Lee & Bill,

The Sub-Prime Crisis... gives more credibility to the need for the CGC to be involved in Grain Security... NOT drop all our CGC Security.

If the Ag Clearing can function.... and make major inroads into the grain business in western Canada... GREAT.

It can easily do this along side the present CGC bonding system.

It can also replace security INSTEAD of CGC Bonding... as an alternative to the Canada Grain Act requirement for financial stability of graincos buying grain in western Canada.



I see the requirement for our capital$$$ increasing... with margin calls on grain sales through the Ag Clearing... I do not see this as a reasonable solution for grain growers being required to put up this security ourselves. Security will not be used... If I must bankrole a production contract with pricing involved.

[TOM4CWB]

Lee and Charlie,

I do not see how, for security, the Ag Clearing is any different than a tender process.

I tender out a sale.

I offer 500t or 500ac of Produce... at $XXX/t. Letter of Credit required.

Performance Bond issued by me.

HOW is the Ag Clearing any different than doing a contract this way?

It isn't.

Price discovery... is different than facilitation of a delivery financials.

Ag Clearing will be used primarily as a security delivery/assurance of payment... not initial price discovery.

My simple point is... I can do this transaction with a tender... much cheaper... outside the Ag Clearing... and cherry pick the system... MUCH cheaper. Why pay $1/t?

Have I missed something?

[charliep]

tom4cwb

AgClearing was not proposed as a 100 % replacement for bonding. Others have suggested as in the federal minister but the program has to get started first/prove itself to the grain supply chain. It may provide additional security for some transactions and in other cases (sales to non CGC licenced buyers) may be the only source of protection. The insert in the Western Producer does a good job of explaining the differences.

You are right in that price discovery is not the major driver of the AgClearinghouse but it has potential to be a major benefit. A requirement will be to improve price discovery and reporting as a way to calculate the daily margin requirements. A side benefit is this information will be available to everyone on a regional basis and add to farmers knowledge as to what recently transacted prices really are. A big help for some of the smaller volume crops or crops not supported by futures markets. Will it be a cost but maybe this is something government should step to support as a a benefit to the industry. ICE (former WCE) does some of this for Quorum now. Will note mandatory price reporting in the US/the posted county prices for their US LDP programs.

I wouldn't think of the margin as a down payment. It is meant to be good faith money and to ensure both sides are capable of fullfilling their end of the contract. It applies equally to the farmer who has to ensure the specified quantity/grade of commodity is available in the delivery period as it does to the buyer to ensure they are able to take delivery/pay on time.

I note again the risk farmers take on delivery. Even if you are only allowing a buyer 1 load grace before being paid, most farmers are on the hook for $10,000 to $40,000 of risk on a "B" train. On hedged grain, your risk will even be more. What happens if you contract 500 tonnes of canola at $600/tonne (using these numbers so math easy). Price declines to $500/tonne but in the mean time your grain buyer has gone broke/not able to take delivery. My math tells me you will likely take a $50,000 hit on this transaction. Canola is likely a foolish example but it has happened on oats, feedgrains and pulses.

[padron]

Keep it up Charlie and you're gonna put me out of a job! Ha!

Seriously, that was an excellent recap.

More to Tom's point. Let's not confuse trading with clearing. In a tender process or any other form of transaction there may or may not be a need to clear the deal. That's up to the parties trading. (It's voluntary). If you feel exposed to contract risk as per Charlie's example or payment risk in respect to your original post describing some concern about who you are trading with, the $1/tonne fee is probably money well spent. I can't see a Letter of Credit process catching on in western Canada to protect every transaction. It's not viable and would add it's own level of cost. Overseas perhaps, domestically - not a chance.

I'm not sure what you mean by "A Performance Bond issued by me." I'm sure your word is your bond Tom and the vast majority of other farmers are equally as trust worthy but there's that small percentage that spoil it for the masses. There are a lot of stories floating around right now about farmers defaulting on contracts. It may be due to the buyer's failure to take the grain on time but if it were a high priced contract it wouldn't be an issue.

That's where dispute resolution by an unbiased third party becomes very valuable. The CGC didn't get into contract disputes and offered no protection to the seller on open contracts or to the buyer for any coverage.

All a clearinghouse does is assess contractual risk and maintain a level playing field between buyer and seller to remove any incentive for either party "not to perform". You decide if and when you need this type of protection. Don't worry about "cherry picking". Your cherries are someone else's apples - that is to say a small problem for you could be a very large problem for someone else. At least that's what other producers are telling us.

[jensend]

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/03/04/cccomms104.xml

[boarderbloke]

it's midnight and just checked out the link you posted jensend. GULP ! how am i going to get any sleep tonight ! wow thanks, interesting ideas there!