Comments to Manitoba Security Commission on the WCE's Move to Electronic Trading

[charliep]

For those of you that are interested in this topic, you can go to this web site:

http://www.msc.gov.mb.ca/legislation/notices/index.html

You have to scoll down a little ways to see the submissions by various parties. Who responded to this call is worth the read alone.

[TOM4CWB]

Charlie;

I was a little surprised by this comment;

Controlled by western Canadian farmers, the CWB is the largest wheat and barley marketer in the world. It has been our experience that electronic trading provides additional functionality to
our commodity risk management activity. In particular, it has been our experience that electronic
trading can offer superior results for options and spread trading relating to agriculture futures when compared to open outcry execution. In addition, the hours of trading can be extended in
the electronic trading environment when compared to the more limited hours currently offered for open outcry trade….

As a participant on the WCE, we utilize the WCE's contracts for risk management of our producer pricing options. The maintenance by the WCE of liquid, transparent and fair markets is important and the conversion to electronic trading is a good means to achieve this objective.

Yours truly,
original signed by
Ward Weisensel
Chief Operating Officer"

So why can't the CWB provide competitive hedges on feed wheat and barley for us... if they are aleady using WCE risk management tools?

[Ration-Al]

Tom,

You seem to be missing the point again. Ward Wiesensal said

"we utilize the WCE's contracts for risk management of our producer pricing options. "

You said

"So why can't the CWB provide competitive hedges on feed wheat and barley for us... "

You can purchase hedges for whatever purpose you like. The CWB does not provide hedges for anybody but their own risk management. It sounds like you expect the CWB to use some sort of volume purchasing power or insider knowledge to get you a better deal on your hedges. It doesn't work like that. The purchasing of hedges by the CWB is a very straight forward process driven by the volume of PPO contracts and the daily pricing on the commodity exchanges.

[Incognito]

I am not going to get into the match above...

Of all the barley that is priced/sold/hedged by the CWB, how much is offset at the WCE? The MSC will be the only ones that can answer that to see if the letter from Ward holds any weight.

In an another life, the excuse I heard day in, day out that the CWB would be too transparent in the pit at the WCE.

What's changed?

[TOM4CWB]

RationAL;

I will be a fruit judge... this is my job.

Provide premium farmgate prices... and show us the money we can put in our bank accounts.

This is the standard the CWB MUST live by if I am involved in manageing sales.

Excuses don't cut it with the customers who buy my products and services.

Why exactly should the CWB expect any different treatment?

[Ration-Al]

Tom

Premium prices. Tell me what price you are getting for your wheat today. What price would you want to get? By how much would you say the CWB is missing the mark? Is it pennies, nickels, dimes or dollars? Are you suggesting that the CWB is leaving money on the table or do they just sell too much wheat? Are there customers that should be paying more? Or are there customers that we just shouldn't be selling to?

Then tell me how you would do it better? Would you pick an arbitrary price level and not sell below that? How much crop are you prepared to leave unsold in farmers bins? How much market share are you prepared to lose for Canada?

[chaffmeister]

I think what Tom is talking about is best illustrated with an example - let's use Oct 29 prices for Rycroft, AB:

CWB Fd Bly FPC = $108.20/t
NET TO FARMER after deductions = abt $68.70/t

CWB Fed Bly PRO = $112.00
NET TO FARMER after deductions = abt $72.50/t

non-CWB feed barley = abt $74.37/t

1. CWB prices from CWB website
2. Deductions were my guess (used the low end of the range)
3. Non-CWB price from Alberta Grain Commission website.
4. Chose Rycroft because the CWB says this is an area where the comparison makes sense (see latest Grain Matters)

Ration-Al - based on the above, how is the CWB is getting and providing value? If these were prices from just another grain company, it would tell me either the company wasn't interested in the business or wasn't very good at it.

[Ration-Al]

This is an example of a dual market. The non-CWB price would represent the domestic market which generally trades at a premium. In fact two years ago the Lethbridge barley price was the highest in the world and only 50,000 tonnes of barley was offered to the CWB.

The CWB price reflects the export market. When the domestic market drops and the export market becomes more attractive as it did last year then significant volumes of barley are offered to the CWB. Last year producers offered almost 2 million tonnes to the CWB.

The price signals when producers should deliver to the domestic feed market or the CWB for export.

This makes perfect sense. When the domestic price is higher than the CWB price then that is probably your best marketing choice. A perfectly functioning DUAL Market.

[TOM4CWB]

RationAL;

1. CWB Basis cost... No COmpetition... 55 cents per bu. less now than March 22... $.55/bu added to the CWB's account. NOT the farmers.

2. CWB PRO keeps dropping... the CWB will not inform farmers what risk management has occured. So as the PRO drops... so do our profits. I am not allowed to use PPO's as directors conflict of interest prohibits use of PPO's.

3. IP programs that give farmer a set price, on all production from a contracted acre. We have been involved for years in these type of Canola contracts... about time the CWB starts these on IP contracts, wouldn't you say?

4. Planned Wheat/Barley Feed contracts ... that use CBOT Wheat and Corn to hedge good prices that are profitable... into the export market.

5. Cash prices that offer a good basis all year long, pool prices from cash, drop the pool sales that the CWB hides behind. When the CWB has a true cost of sales, the CWB must not sell too low. When prices are too low... just like Canola... farmers stop selling... this should mean the CWB stops too.

Proper Sales timing, and a good basis insure my farm a profit. Other farms need these services from the CWB. About time we provide them, isn't it?

[chaffmeister]

Ration-Al:

I don't think you missed my point - you simply avoided it.

The point is this - in the Rycroft example, what value did the CWB bring to the market? As Tom has asked, where is the premium? This doesn't apply to just Rycroft, it applies everywhere.

You say that the CWB price reflects the export market. But it doesn't. The year the feed barley pool was 54,373 tonnes the pool price was not reflective of export markets at all. It was a function of two things:

1. Interest earnings became way out of whack due to the small barlet pool. The PRO therefore became the CWB's best guess as to where to put the price so that it didn't attract too much or too little feed barley.

Evidence: According to the CWB, "the directors decided that the fairest and most fiscally responsible solution was to maintain the 2001-02 Pool Return Outlook (PRO) for feed barley at a level that reflected earlier pool return indicators and did not distort the domestic barley market." This does not say the PRO was reflective of the export market.

Further, according to the CWB website, "Publishing a higher PRO based on additional (interest) earnings would have encouraged additional barley deliveries and in the end, eroded the PRO, taking it under the $180 per tonne mark." One of the worst things the CWB could do is to publish a PRO of $180 only to have the final much lower, say $140 or less.

2. According to the CWB website, of the 54,000 tonnes delivered to the CWB that year, 30,000 tonnes were sold within western Canada. Of course that's where it should have been sold. The domestic market was $195 - nothing should have gone offshore at all.

So the PRO that year was a function of domestic prices and internal CWB manipulations of the price. So explain again how the PRO is a reflection of the export market.

By the way, in 01/02, $179.59/t basis instore Vancouver was above the export market that year. Be careful - could be seen as an export subsidy.

[chaffmeister]

Just a couple more points:

1. The 01/02 feed barley pool was 54,373 tonnes that generated $9.505 million in revenue. If we assume that 30,000 tonnes went domestically (as the CWB indicated) and we assume the price to be $190 (against a $195 market indication), that means domestic sales generated $5.7 million, leaving $3.805 million for exports. This would mean the average offshore sale price was $156.12 per tonne.

Compare that to the PRO of $179.59/t. Also begs the question - why did the CWB sell anything offshore that year - the domestic market was never that low that year. It should have sold everything domestically, which then begs the question, why should the CWB be in barley at all?

2. Just to get us back on track - how is it that the CWB can justify such poor performance when it is using the same tools as the rest of the market - WCE feed barley futures?

[TOM4CWB]

Chaffmeister;

VERY good points!

Care to comment on #1/2CWRS wheat over 13.5px... which is gaining over a dollar a bu. premium... in the US?

Where are these premiums in the CWB system?

The CWB says they can match US prices any day... any time.

RationAL; where are our no-cost export licenses? Must you funnel all grain thru CDN elevators, railways, ships going east... is this the real purpose of the CWB legislation!

Hold down prices...

Force Ag. produce into the CDN AG/Industrial economy at a cost to them of less than the cost of production... the majority of the time...

Control Western grain Farmers by limiting income, whenever needed.

If I am elected... certainly these above issues will be dealt with.

What about you RationAL... where are you at? DO you agree that $1.60/bu 58lb and above feed wheat is a fair farm gate price?