Last Call For SPE

[crusher]

With the collapse of all new crop bids - wheat(non board and CWB), barley and canola, what's the smart money doing with the spring price endorsement? I've never been keen on puts this far out, but I may try wheat and barley. I see new crop canola held today for a triple bottom, if it breaks down tomorrow I may SPE canola also. Barley and wheat charts just look brutal.

Tom/Charlie: did you see how they do the fall calculation for CPS. My handout says 2CPS=2CWRS-(1CWRS11.5%-1CPS)based off October PRO. Why would they base the 2CPS price off three other wheats? Was also wondering about deductions? Looks like CWB smoke and mirrors, but this is Alta Ag, or am I reading the wrong info?

[TOM4CWB]

Crusher;

I know things have changed on CPS since the 2002 Crop Insurance debacle on price increases at the end of July 02...

Bottom line for 03 is with the CWB in charge of the PRO... and no election in 2003... need I say more?

[charliep]

The objective of setting up crop insurance the way AFSC has is to come up with a visible pricing process that farmers could understand when they signed up for the spring price endorsement and could monitor in the fall. At the same time, it had to reflect the realities of CWB price pooling. The approach used in the producer pricing options offers an alternative that does this.

The 2CWRS is the average converted MGE wheat futures price during the month of May minus $45/t. I can get into reasoning if asked. Based on current PPO prices, this results in a current new crop price of $140/t. You can compare to the current crop insurance price and come to your own conclusion.

AFSC could have used KCBT for CPS wheat but we weren't satisfied on how stable this basis is. Using the spreads in the Oct. PRO seemed a better way - this is something that will have to be reviewed next year. The spread between 1CWRS11.5 and 1CPSR today is $27/t. The price is $113/t.

The two ways to look at this process are 1) do the math by multiplying your coverage yield times the winter price (this is your guaranteed revenue) and compare to the premium and 2) use the same thinking as with a put option - compare the crop insurance winter based prices to current new crop offered prices (in at least some crops you are deep in the money) and evaluate the premium based on this.

[TOM4CWB]

Charlie;

Can you go through the calculation that gave the $113/t for a (2CPS Red I believe we are insured for) CPS 2003 base for Crop Insurance please.

[crusher]

Tom, I'll try the calculation.
2CPSR = 2CWRS(Dec MGE average for October, converted by Cnd $ - $45/t basis) less October PRO spread between #1CWRS 11.5 and 1CPSR.

MGE December wheat = $3.41/bu or $125.28/t, with Cnd dollar @ $.68 gives $184.24.

2CWRS = $184.24 less $45/t basis
= $139.24

#1CWRS11.5 PRO = $193
#1 CPSR PRO = $162
Spread between above = $31, not $27 based on April PRO for 03/04.

Therefore
2CPSR fall market price using today's prices would be:
$139 - $31 = $108 or $2.93

For 50 bushels coverage, my premium is $14.45 for SPE, which would have a payout of $4.46 - $2.93 = $1.53/bu, or $76.50 per acre. Return on SPE $5.29 to $1. The variables are MGE Dec wheat and the Canadian dollar in October, you tell me what they will be so I can make up my mind.

[charliep]

Crusher

Don't know what will happen to the loonie/MGD wheat. My probability of payout under the program is about 2/3. My thought process is that for $14.45 of premium, you have a guaranteed revenue/acre of $223 ($4.46 times 50 bu/acre).

Another risk is the spread narrowing from the $31/t to say $20 - I think this is likely.

Another alternative is to combine the strategy with a US wheat call. Your risk factor (when I say risk, I speak tongue is cheek is this is a better a good thing - but means that your premium would have gone for not) on wheat (assuming a 69 cent loonie) is Dec. MGE wheat rallies over $3.75/bu ($3.41 today). A strategy is to buy a 3.75 MGE Dec. call (about US 10 cents/bu today or Cdn 5.32/t or $7.24/acre). You are covered by the spring price endorsement up to $3.75/bu. The call kicks in if prices head above $3.75/bu.

I look forward to ongoing discussion on the spring price endorsement as the summer/fall proceeds. A brand new world for government.

Another comment I will make is I am impressed with the farmers that have called in for detailed information and how they related SPE to other risk management tools. There is a good knowledge of options strategies by many managers.

[TOM4CWB]

Charlie;

I don't know where your optimism come from for the spread to narrow on CPS Red... the CWB has recked the CPS base grade quality by promoting non Crystal quality CPS varieties... by refusing to pay a premium for Crystal... and past years have proven the CWB CPS market development programs that do pay a premium to be non viable in many cases.

CPS Red 5700 sales have been dreadful this spring.

If and when the CDN dollar heads for $.75 US this fall... the risk reward certainly looks good for the SPE to pay big rewards... If we have anywhere close to a normal crop...

[crusher]

Tom, does the board have any contracting programs for Crystal or 5700PR this year? Big seed price probably one reason farmers are shying away from 5700.
Looks like a few days before we are in the field. Hopefully can catch up on some sleep after doing tax returns and crop insurance calculations until the wee hours.
Is there a "good news" thread going anywhere. Seems like I've been stuck in that Western Producer mentality, seeing the downside of farming lately. Board PROs in the tank, $$ at four year highs, fertilizer prices bla, bla bla. I hear livestock numbers are way down, therefore the outlook for feed grains in the future should be poor. The list goes on and on.
What are some of the thoughts/actions that keep participants motivated during the day? With the curling season behind us, what keeps Charlie upbeat until October?

[TOM4CWB]

Crusher;

We were the only confirmed 5700 seed purchaser from our favorite seed distributor... 5700 CPS is again a market development program with the CWB... as just about no one (except our farm) actually contracted under 800t contracted out of over 8000ac in the end.

The CWB was and still is offering $5/t premium for planting Certified 5700 CPS Red seed, plus storage.

THis year the 5700 can be delivered to any elevator instead of just Agricore United... as was the case for the 2002 crop.

Have fun with our beloved CCRA!