Latest CWB EPR's

[jack]

Can anyone explain to me why a downturn in U.S. wheat futures since the last CWB EPR's were announced, should have a $10/t detrimental effect on the current EPR's, when presumably a good deal of the sales were already on the books, and yet have no effect at all on new crop PRO's?

[charliep]

The obvious answer is that actual prices on sales over the mid March to mid June period were less than that forecast in the March EPR. One thing that makes the process a little more difficult this year is the fact the CWB is likely carrying higher than normal unpriced portion of the overall pools (i.e. a sales program more weighted to the last half of the crop year). Farm deliveries of wheat (ex durum) to week have amounted to 11.7 MMT versus 15.3 MMT a year ago. Wheat exports (ex durum) have amounted to about 9.3 MMT versus 14.6 MMT in 1998. The CWB will have additional sales booked for this summer but I suspect they are fairly light relative to the inventory they have for sale. Given the uncertainty around this years crop/potential for higher prices on a 1999 quality wreck, the CWB is likely to carry a major amount of wheat inventory unpriced into the 99/00 crop year. A good indication of this is the fact that wheat (ex durum) July 31 carryover will be around 6 MMT versus 4.5 MMT last year. The impact is sales over the next 4 months of the pooling year (assuming a Sept. 30 pool close) and how unpriced inventory is valued into the 99/00 crop year will make EPR price forecasts a lot more volatile than what might be expected. A final note is the price forecasting process for the EPR likely occurred ahead of this last rally. You also have to note that recent MGE futures prices have slipped back to early June levels. Given the risk the CWB (and thus you farm managers) carry on unpriced inventory, any thoughts on how aggressive the CWB should be on a hedging program? If you were in the CWB, would you have aggressively sold this last wheat rally as a hedge to protect pool returns?

[charliep]

The greatest impact on the EPR has been the strengthening Cdn dollar. Almost all sales are done in US dollars. When the Cdn dollar strengthens relative to the US dollar, the return in Cdn dollars is a lower value. For example, consider a sale at $150 US at FOB position. At a $.64 Cdn dollar, that would return about $235 Cdn ($150 Us/.64). If the Cdn dollar is at $.68, that value returns $220 Cdn, a $15/tonne difference. Once a sale is entered into, the foreign exchange risk is hedged to the extent possible. There is a lot of variability on the timing of sales, and on the fluctuations on foreign exchange. To speculate on what direction the Cdn dollar is heading vs the Us dollar in anticipation of a sale is risky. As far as the carry out numbers, I think Charlie's estimates of wheat only are a little high, but assuming a carryout increase, quite a bit of it has stayed on the farm (not signed up on CWB contracts). If you look at the elevator space levels in the country, its at about 35-40% right now. I think total country elevator space will be higher than that at year end. There may be some stocks in terminal position at July 31, as there is every year, which will apply to sales that were booked prior to July 31. Last year, country and terminal elevator levels were a very low historic levels. I think this year's elevator and terminal inventories will be close to last year's. Great question! Tom Halpenny

[charliep]

Thanks for your thoughts Tom. I have to turn the question around as to why farm managers wouldn't have aggressively contracted wheat on the early series? Is contracting on a later series/holding CWB wheat out of the 98/99 pricing pools a better investment of money than other alternatives even if you have no debt in your business? I also have to highlight a couple of others factors. I am bullish prices going into 99/00 but you need to recognize that the CWB pooling period is about 3 months out of sync with winter wheat crops around the world (assuming a Oct. 1 start to the 99/00 pooling year, there is 3 to 4 months where 2000/2001 market conditions will impact pool returns based on May/June US winter wheat harvest plus the EU July harvest). The other factor is that carrying a lot of wheat to the end of the crop year almost always negatively impacts old crop pool returns. If the market is headed higher and everyone carries wheat into the new crop pooling period, they effectively deprive old crop of these higher priced sales - 98/99 pool returns end up lower. If the attitude/reality is prices are headed lower, then farm managers make sure they are priced out in old crop therefore making sure the pool feels the impact of the lower end of the year sales - lower pool returns again. My attitude to the CWB is the same as I have with my mutual fund investments. In both cases I have faith in their expertise so I try to get my money/wheat to them as quickly as possible to let them do their job in my best interest. If I am going to second guess them all the time by timing sales on my own, I should be in some other type of investment/market system. Any thoughts on this?

[charliep]

I think farmers by and large follow your thinking on signing up grain on contract. The profile of signup by contract series wasn't much different this year than other years. A large majority is signed on the Series A contract. I can only speculate that the early estimates of available wheat was a little high, and perhpas more went into the off-board market than was anticipated this year. In my experience, most farmers that reserve signing up grain on contract do that because they are keeping stocks for seed, blending or other purposes. They can deliver into this crop year and price into next crop year after May 1, under the 90 day pricing guidelines of the CGC, and many do that if they wish to price into the next pool year. Tom