Buying back CWB PPO contracts

[TOM4CWB]

Charlie and Lee;

I need some help here…

I have explained that the Basis Contracts the CWB offers “designated area” grain producers are unfair before… to the extreme.

Now I was looking at buying out my CPS Red PPO fixed price contract… as of yesterday the 23rd of January 2003.

I was told on the CWB information line the following facts:

1. The Kansas City Futures for Jan 23, 03 March 03 CWB conversion to CDN$193.42/t.
With the CWB PPO Basis of July 24th 2002, the discount of $17.48/t means that a price out for Jan 23, 03 would return a farmer....

$175.94/t Vancouver Port Price.

2. The CWB said that my replacement cost to buy out my 1CPS wheat Jan 23, 03 was $233.20/tCDN in store Vancouver.

Now… we can do a basis calculation… $233.20 minus $175.94 equal to... $57.26/t.

The CWB gains $57.26/t … on every tonne contracted.

Now, we will get into the more complicated calculations.

When I priced my CPS Red on July 24th 2002, the CWB converted Kansas City price for March 03 was $216.17/t.

If we subtract the Jan. 23, 03 CWB quoted price of CDN$193.42/t from the July 24 CWB quoted price of $216.17/t (both Mar. 03 futures) we are left with a profit of $22.75/t in the CWB's futures accounts.

I am told, this $22.75/t means nothing to anyone, the CWB keeps this with no credit back to me in any way.

Now, since I had flat priced at July 24th 02 CWB price of $216.17/t (Mar. 03 futures CWB price) minus the CWB Basis charge of $17.48/t, I have a flat price of $198.64/t.

The person on the CWB Info line said, we take the CWB sales replacement value of $233.20/t, and subtract my contracted price of $198.64/t for a yield of $34.56/t to the CWB’s favour.

So to get back into the pooling account, I must give up $22.75/t plus pay the CWB an additional $34.56/t, for a total yield of $57.31/t.

The $57.31/t. I am said to owe, and the $57.26/t the CWB would gain on a straight basis price out today...., must be the same number....,

this is basis profit the CWB says it is entitled to either way.

Now comes a more interesting revelation…

The CWB Replacement Sales value for today ,the 24th of Jan. 03, is $228.09/t ...

some $5/t below yesterday’s price.

I asked , how did you arrive at this?

The person said, “If you had done this buyout on Jan. 22nd 03, prices it would have cost you only $10/t, instead of $34.56/t".

I said, “how do you come up with these buyout numbers?”

“Just the difference between the sales value, and the contracted price”, he said.

So lets review;

Jan 22nd 03, CWB Vancouver in store sales value of $208.69/t

Jan 23rd 03, CWB Vancouver in store sales value of $233.20/t

Jan 24th 03, CWB Vancouver in store sales value of $228.09/t

Yet the Cash and futures values have hardly changed more than a few cents per bushel in the past 3 days!

How can CWB world prices fluctuate $24/t in one day, if the monopoly is extracting a true premium?

Now;

My CWB Contract says the CWB can only charge me the COST for the CWB of doing the PPO contract, how can the CWB consider extracting $57.31/t out of me, above cost?

Since there is no futures loss, where did the CWB lose any money on me?



Wasn’t the promise the CWB made on PPO contracts, a promise that they (the CWB) would charge just time, interest, and Admin costs, as specifically identified and quoted in the pricing quotes we were given when we priced?

[charliep]

I have gone through the math and I can't explain. The question should be to the CWB with a response to this thread. As a comment, the producedere pricing options were never based on a spot price but rather an adjusted futures value to reflect the realities of price pooling. I can work back and forth through the numbers but would be guessing.

[TOM4CWB]

Charlie;

In a normal basis contract, the basis charge would be the present basis to buy the grain from another farmer... which should be today, the initial price... as this is what it would cost the CWB, isn't it?

Further, if anyone can walk in and contract and deliver to the pooling accounts today, without penalty, why should I pay a penalty to the CWB for entering the pooling account?

Instead the CWB expects me to pay a $57/t penalty, not the specific cost just related to the sale of my grain.

How can this be legal?

I must assume that an unpriced basis contract would owe the CWB June basis $57/t in this same case (as indicated to me), and if the July basis PPO Contract were unpriced, the basis would be $10/t higher yet!?

And the CWB has made doing PPOs illegal for CWB Directors, is there any wonder why?

Isn't this kind of like the parliament of Canada telling the M.P.'s they can't live in the constiuency they were elected in, because the laws they enact in parliament might hurt the M.P.?

[charliep]

Just comparing the where you contracted futures and current prices, there should be a $20 to $25/t profit (sold futures for a converted price of $216.17/t and bought back for $193.42/t or close to depending on the day).

Your basis pain is about $55/t (moved from $18 under to $37/t over).

An interesting comment is that none of this is even relevant to anything. First, is KCBT a relevant futures for CPS wheat. There is virtually no CPS wheat delivered to the CWB but what is will be sold to middle east (competition Aussie and EU), and S.E. Asia noodle markets (Aussie). None of these markets relate to Hard Red Winter. Why is the CWB using this futures contract?

The other thing is this whole process is based on non real prices (all related to the pricing pools). The PPO price you locked in had no relation to the forward prices for CPS wheat (at least that could be forward sold) in July (it was adjusted for pooling realities). The price of the buy back has no relation to the current selling price of CPS wheat (averaged/pooled price further fuzzied by application of spreads the CWB thinks are relevant). The PRO used is only a best guess and still not a real price (can move up or down over the next 6 months).

It would be interesting to challenge the contracts in court.

1) Do the CWB contracts have a sound basis in economic/risk management theory? How would an outside review find the PPO effectiveness/discipline used in protecting both farmer users and pricing pools interests?

2) Did the contract farmers signed cover all aspects of the participants responsibilities adequately? Was the contract set up in such a way to protect the CWB's interests only? Are there loop holes in it?

3) Was the contract adequately explained to the farm manager at the time of signing? Did the individuals who explained the contract have adequate knowledge of it and did they have the proper credentials to market this product?

Not a lawyer but I have a sense the CWB would lose a court challenge on these contracts.

I will find it interesting to see the changes that occur to the 2003/04 PPO contracts. My understanding is they are de-coupling them from the PRO forecasts but that has yet to be seen.