Was going to put this in the area on the buy but not 100 % related so will start another. Interesting the CWB wants to monkey with the current - under the current constraints/mandate, the CWB has not be able to manage the price risk around this program relative to the pricing pools (big losses). Rather than reviewing the way they handle risk, they have gone back to the drawing board on the program. Good bad or indifferent will have to be demonstrated. The trade off is no cap on volume for an unknown price calculation.
The reason I was going to put into the buy back discussion is the CWB committed to keeping a tight relationship between the PDS and the DPC to deal with cash flow issues for farmers who use the programs and maintain a fairly tight relationship between the two values.
To answer some of the questions around the old, you have to go to the guidelines/objectives of the current one.
You can find this information at:
http://www.cwb.ca/public/en/farmers/producer/daily/
Like a good sermon, I have to look at specific verses - oops - I mean paragraphs from the CWB information.
Verse - Why the DPC?
"The DPC is designed to provide farmers with additional price flexibility and to increase their ability to manage cash flow. U.S. elevator bids and market price relationships are used to establish daily cash prices for each class, grade and protein level of wheat. The program is one of the range of Producer Payment Options (PPOs) the CWB now offers producers, and like all other PPOs, the DPC is guided by the principle that it must be consistent with the maintenance of a competitive and viable pooling option."
Verse 6: Basis risk associated with the program.
"The price risk associated with higher futures movement on any given day can be offset by the CWB hedging program. The CWB sells futures when the farmer locks in the DPC reference grade value and buys futures against the tonnage in the program according to the CWB sales pace. Compared to other PPOs the CWB offers, there is considerably more unhedgeable basis risk for the DPC. One source of this additional risk is the use of a single market – the northern tier of country elevators in the United States – to determine DPC pricing, when sales are made against a number of other market price structures with varying basis levels."
Verse 9: CWB commitment to keep spread between the PDS and DPC narrow.
"As part of the DPC operating guidelines, the CWB is also committed to keeping the spread between the DPC and the Producer Direct Sale (PDS) relatively narrow and stable with the proviso that under exceptional circumstances, the spread could be widened to protect grain that was required for the CWB marketing. This provision has never been exercised. The linkage between the PDS and the DPC provides farmers with the assurance that both the DPC and PDS will track the average price to cross border elevator prices for grain of similar quality. If the DPC price is low relative to an elevator across the border, then selling to the U.S. using the PDS should be attractive. Conversely, if the PDS is high relative to the cross border prices, then the DPC is also likely to be high."
From the questions and answers on the DPC:
"Why is the PDS value higher than the DPC ? I thought they were both priced off the U.S. market?
The DPC is a U.S. elevator equivalent 'buying price'. The PDS is the CWB asking or 'selling price'.
The PDS reflects the CWB's asking price for sales into the U.S. market to end use customers. The PDS is based off daily U.S. market prices and is comprised of the daily relevant U.S. wheat futures price plus the CWB sales basis.
The DPC is also based off the same daily U.S. wheat futures and a basis prices. The basis offered to producers will be similar to the basis levels available to U.S. producers delivered into local elevator locations.
Since the PDS and DPC are both determined using the same daily futures values, if there is a difference in price, it will be a result of differing basis levels between the PDS and DPC. The spread between these basis levels will be the producer's cost to access the U.S. market."
I note the CWB has indicated they are consulting on the DPC program so I thought I would post this to generate some discussion.
What are you looking for in the new program? How much risk is there that CWB will water down the program (which to me will be a wider spread between the PDS/DPC) that will not be usefull anymore? What are the true costs of CWB producer pricing options and who pays them.
The reason I was going to put into the buy back discussion is the CWB committed to keeping a tight relationship between the PDS and the DPC to deal with cash flow issues for farmers who use the programs and maintain a fairly tight relationship between the two values.
To answer some of the questions around the old, you have to go to the guidelines/objectives of the current one.
You can find this information at:
http://www.cwb.ca/public/en/farmers/producer/daily/
Like a good sermon, I have to look at specific verses - oops - I mean paragraphs from the CWB information.
Verse - Why the DPC?
"The DPC is designed to provide farmers with additional price flexibility and to increase their ability to manage cash flow. U.S. elevator bids and market price relationships are used to establish daily cash prices for each class, grade and protein level of wheat. The program is one of the range of Producer Payment Options (PPOs) the CWB now offers producers, and like all other PPOs, the DPC is guided by the principle that it must be consistent with the maintenance of a competitive and viable pooling option."
Verse 6: Basis risk associated with the program.
"The price risk associated with higher futures movement on any given day can be offset by the CWB hedging program. The CWB sells futures when the farmer locks in the DPC reference grade value and buys futures against the tonnage in the program according to the CWB sales pace. Compared to other PPOs the CWB offers, there is considerably more unhedgeable basis risk for the DPC. One source of this additional risk is the use of a single market – the northern tier of country elevators in the United States – to determine DPC pricing, when sales are made against a number of other market price structures with varying basis levels."
Verse 9: CWB commitment to keep spread between the PDS and DPC narrow.
"As part of the DPC operating guidelines, the CWB is also committed to keeping the spread between the DPC and the Producer Direct Sale (PDS) relatively narrow and stable with the proviso that under exceptional circumstances, the spread could be widened to protect grain that was required for the CWB marketing. This provision has never been exercised. The linkage between the PDS and the DPC provides farmers with the assurance that both the DPC and PDS will track the average price to cross border elevator prices for grain of similar quality. If the DPC price is low relative to an elevator across the border, then selling to the U.S. using the PDS should be attractive. Conversely, if the PDS is high relative to the cross border prices, then the DPC is also likely to be high."
From the questions and answers on the DPC:
"Why is the PDS value higher than the DPC ? I thought they were both priced off the U.S. market?
The DPC is a U.S. elevator equivalent 'buying price'. The PDS is the CWB asking or 'selling price'.
The PDS reflects the CWB's asking price for sales into the U.S. market to end use customers. The PDS is based off daily U.S. market prices and is comprised of the daily relevant U.S. wheat futures price plus the CWB sales basis.
The DPC is also based off the same daily U.S. wheat futures and a basis prices. The basis offered to producers will be similar to the basis levels available to U.S. producers delivered into local elevator locations.
Since the PDS and DPC are both determined using the same daily futures values, if there is a difference in price, it will be a result of differing basis levels between the PDS and DPC. The spread between these basis levels will be the producer's cost to access the U.S. market."
I note the CWB has indicated they are consulting on the DPC program so I thought I would post this to generate some discussion.
What are you looking for in the new program? How much risk is there that CWB will water down the program (which to me will be a wider spread between the PDS/DPC) that will not be usefull anymore? What are the true costs of CWB producer pricing options and who pays them.
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