CWB risk management

[TOM4CWB]

Charlie;

Upon further questioning on 2003-04 PPO contracts, the CWB now appears to be removing the “pool basis” part of the pricing calculation. If I have this correct, the CWB is inserting a “projected futures price” in the place of the “pool basis” which I am told will make the basis between PRO’s “less volatile” .

What does all this mean, Charlie?

Now, regarding CWB handling of the futures transacted on behalf of PPO contract holders...

I am told CWB hedges the producer pricing options by selling the futures when producers lock-in a FPC or when they lock-in the futures component of a Basis Price Contract (BPC). Then CWB takes this hedge off by buying back (unwinds) the futures as the CWB does pool sales, instead of taking the hedge off as the specific PPO contracted grain is delivered to fill the PPO contract held by a specific producer.

Producer Timing of PPO contract deliveries are optional to the grain producer WHEN a PPO contract is filled.
PPO contracts can be any time during the crop year… from the first deliveries made (in August for instance)… to the option of the producer to be the last delivered wheat to the CWB in the last month of the crop year.

This is what Adrian Measner wrote me on February 24th, 2003;

"As you may be aware, the CWB hedges the producer pricing options by selling the futures when producers lock-in a FPC contract or when they lock-in the futures component of a Basis Price Contract (BPC). THE CWB UNWINDS THIS HEDGE BY BUYING BACK THE FUTURES AS THE CWB PUTS SALES ON THE BOOKS (ESSENTIALLY THE CWB IS BUYING THESE PRODUCERS OUT OF THE POOL ACCOUNT OR OUT OF ALL SALES). THEREFORE, MOST OF THE FUTURES BOUGHT BACK TO DATE WOULD HAVE BEEN PURCHASED AT VALUES HIGHER THEN THE CURRENT MARKET." (EMPHASIS ADDED)

How does this CWB risk management strategy actually mitigate risk?

How can a specific PPO contract be tracked, to actually determine real costs of liquidating a PPO contract?

If the CWB manages to create such a web of chaos in PPO contracts, what strategy is used with Pooling risk mitigation?

Has anyone got answers?

[charliep]

The major change this year is the fixed price contract/basis can be higher than the PRO on the date of its monthly release. We'll see if this happens on Thursday.

Your comment on how they handle risk is correct - they cover a PPO using futures contracts over the whole pooling period - not just the month chosen by the farmer. I will let someone from the CWB explain the logic.

[TOM4CWB]

Charlie;

If the CWB took off the CPS hedge last October for instance (02-03 PPO contract) and I deliver today, there could be close to a $100/t loss on this hedge... to the contingency fund, that I did not cause.

The CWB did, because the CWB did not match the hedge to the DELIVERY I make, which does not have anything to do with the futures month I originaly contracted under.

Since the CWB has control over WHEN I deliver the PPO contract, the CWB must be responsible to manage the hedge risk, since they set up this goofy setup to begin with!

How does all this PPO CWB smoke and mirrors add up to a logical risk mitigation strategy?

[charliep]

I will let the CWB answer your question.

Perhaps why market choice is so important. It allows the CWB to run their business as they see fit and at the same time allows farm managers to select the most appropriate management decisions for their operation.

[TOM4CWB]

Charlie, Julie and Lee;

Is it possible to get the CWB to answer questions we ask here on Agri-ville?