Charlie, Lee, Chaffmeister;
I am trying to understand the CWB’s point on Cherry Picking the pooling accounts… and why the CWB believes I would be Cherry Picking… if it let me back into a pooling account with my CWRS wheat.
Here is the contract wording as the CWB stipulated;
"Default: General Provisions" (as stated in the CWB contract)
5 b.Further, the Producer shall pay liquidated damages to the CWB to compensate the CWB for its actual losses incurred as a result of the Producer’s default. Such liquidated damages shall be equal to the Buy-out Price in effect at the time of such default.
5 d.The Producer and the CWB agree that liquidated damages determined in this manner are a genuine pre-estimate of the actual damages the CWB will incur as a result of the default by the Producer and that such damages are not a penalty.
1.I have not agreed to a specific grade to be delivered… just to the wheat in a specific class (clause 4e of the contract)… let us take CWRS as an example.
2.If the CWB on Feb 12, 2003, determined that the “buyout price” was $266.30/t for a #1CWRS 13.5 (base grade)… and then this is to be the true opportunity cost of the base grade on this day.
The CWB claim is that if I had an unpriced Basis Contract… and wanted to liquidate this contract… I would price at the Feb 12, 2003 CWB Mar. 03 futures… of $213.70, add the $12.21/t July positive basis, and therefore create a cost base for the CWB of $225.91/t.
Then the CWB would subtract the buy-out price of $266.30/t from the $225.91/t… thereby they believe being justified in charging $40.39/t I cannot agree with this as the true cost... I would argue the true cost is the Jan 23rd PRO ($274.00/t), minus the buyout price of $266.30/t... for a PPO buy-out cost of $7.70/t
3.Therefore I cannot reconcile the current CWB buy-out cost formula... it doesn't reconcile with being... “5b… compensation to the CWB for its actual losses incurred…
The CWB could not pre-sell my contracted CWRS grain… as the CWB does not know before I deliver… what grade it will before I do deliver, therefore cannot pre-sell feed wheat to Japan, or conversely sell a #1CWRS 15.5 wheat to a non-human consumption domestic end user in Edmonton.
Therefore my PPO delivery is functionally no different to the CWB than a delivery to the CWRS pooling account.
4.If the benchmark is to be the Pool Return Outlook for PPO contracts in the beginning, then the Pool Return Outlook CWRS base grade in this case, needs to be the cost replacement base to the CWB PPO contract. The cost to replace my grain with other grain from the CWRS Pool is the true and genuine cost to the CWB. I would argue strongly, that this is in fact the “genuine pre-estimate of actual damages the CWB will incur…”
In Canola, this would be the “street price” to base liquidation damages for a defaulted contract upon… as far as a fair market value to replace the grain in which my default has caused the need to be replaced.
Now if I need to replace grain, just as the CWB can do, I can go and replace this grain with un-contracted, to any of the A, B, or C Series contracts to the CWRS pooling account.
5.Therefore, if the CWB has gained a futures profit on my behalf, of say $20/t(for example), and the actual value the CWB states as the “buy-out price” was the CWRS Feb 12, 2003 base price of, $266.30… It would only be normal commercial practice in the grain trade, to add the futures profit to the $266.30/t.
6.We now arrive at $288.30/t… and if this number is higher than the Pool Return Outlook, from Jan. 23rd 2003, then the CWB does not have to pay any amount over the PRO value…(as is normal practice in the grain industry)...
The PRO CWRS base value on January 23rd 2003 was $274/t… then the CWB would not owe me anything, and because the transaction was positive in the favour of the CWB… I would not owe the CWB anything either.
I believe these issues really bungle up the fair application of PPO's especially when the CWB forces farmers to contract their grain before any grain is even close to being in the bin.
Risk management cannot be one sided, yet fairness is maintained to those farmers who do depend on the CWB Pooling accounts.
I welcome all comments on this issue... as it is bothering many farmers I know... who would like a good contracting tool to be avaliable...
THe huge basis the CWB charges is another issue that must be addressed..., do we need a pool for the basis, and just hedge the futures?
I am trying to understand the CWB’s point on Cherry Picking the pooling accounts… and why the CWB believes I would be Cherry Picking… if it let me back into a pooling account with my CWRS wheat.
Here is the contract wording as the CWB stipulated;
"Default: General Provisions" (as stated in the CWB contract)
5 b.Further, the Producer shall pay liquidated damages to the CWB to compensate the CWB for its actual losses incurred as a result of the Producer’s default. Such liquidated damages shall be equal to the Buy-out Price in effect at the time of such default.
5 d.The Producer and the CWB agree that liquidated damages determined in this manner are a genuine pre-estimate of the actual damages the CWB will incur as a result of the default by the Producer and that such damages are not a penalty.
1.I have not agreed to a specific grade to be delivered… just to the wheat in a specific class (clause 4e of the contract)… let us take CWRS as an example.
2.If the CWB on Feb 12, 2003, determined that the “buyout price” was $266.30/t for a #1CWRS 13.5 (base grade)… and then this is to be the true opportunity cost of the base grade on this day.
The CWB claim is that if I had an unpriced Basis Contract… and wanted to liquidate this contract… I would price at the Feb 12, 2003 CWB Mar. 03 futures… of $213.70, add the $12.21/t July positive basis, and therefore create a cost base for the CWB of $225.91/t.
Then the CWB would subtract the buy-out price of $266.30/t from the $225.91/t… thereby they believe being justified in charging $40.39/t I cannot agree with this as the true cost... I would argue the true cost is the Jan 23rd PRO ($274.00/t), minus the buyout price of $266.30/t... for a PPO buy-out cost of $7.70/t
3.Therefore I cannot reconcile the current CWB buy-out cost formula... it doesn't reconcile with being... “5b… compensation to the CWB for its actual losses incurred…
The CWB could not pre-sell my contracted CWRS grain… as the CWB does not know before I deliver… what grade it will before I do deliver, therefore cannot pre-sell feed wheat to Japan, or conversely sell a #1CWRS 15.5 wheat to a non-human consumption domestic end user in Edmonton.
Therefore my PPO delivery is functionally no different to the CWB than a delivery to the CWRS pooling account.
4.If the benchmark is to be the Pool Return Outlook for PPO contracts in the beginning, then the Pool Return Outlook CWRS base grade in this case, needs to be the cost replacement base to the CWB PPO contract. The cost to replace my grain with other grain from the CWRS Pool is the true and genuine cost to the CWB. I would argue strongly, that this is in fact the “genuine pre-estimate of actual damages the CWB will incur…”
In Canola, this would be the “street price” to base liquidation damages for a defaulted contract upon… as far as a fair market value to replace the grain in which my default has caused the need to be replaced.
Now if I need to replace grain, just as the CWB can do, I can go and replace this grain with un-contracted, to any of the A, B, or C Series contracts to the CWRS pooling account.
5.Therefore, if the CWB has gained a futures profit on my behalf, of say $20/t(for example), and the actual value the CWB states as the “buy-out price” was the CWRS Feb 12, 2003 base price of, $266.30… It would only be normal commercial practice in the grain trade, to add the futures profit to the $266.30/t.
6.We now arrive at $288.30/t… and if this number is higher than the Pool Return Outlook, from Jan. 23rd 2003, then the CWB does not have to pay any amount over the PRO value…(as is normal practice in the grain industry)...
The PRO CWRS base value on January 23rd 2003 was $274/t… then the CWB would not owe me anything, and because the transaction was positive in the favour of the CWB… I would not owe the CWB anything either.
I believe these issues really bungle up the fair application of PPO's especially when the CWB forces farmers to contract their grain before any grain is even close to being in the bin.
Risk management cannot be one sided, yet fairness is maintained to those farmers who do depend on the CWB Pooling accounts.
I welcome all comments on this issue... as it is bothering many farmers I know... who would like a good contracting tool to be avaliable...
THe huge basis the CWB charges is another issue that must be addressed..., do we need a pool for the basis, and just hedge the futures?
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