Factors Impacting the Market This Week/Strategies

[charliep]

Realize raining today so a day to check in on factors/strategies.

Things I am noting.

1) Hate to forecast CWB FPC basis but will note has narrowed up somewhat (particularly with the adjustment factor). If you are looking at basis price contracts to hold pricing opportuntities into late winter and spring, you may want to look at these contracts.

2) Note comments about a potential weaker US dollar in another thread. Should Canadian farmers look at hedging currency risk (i.e. calls)?

[btjadenlepp]

here goes, these are just my humble opinions:

1. I really liked the wheat Basis contract idea about a month ago but now I'm not so sure. Right now we're staring down likely bigger-than-expected increase in winter wheat acres. I've also come to accept we're probably past the point where a weather problem anywhere could reduce this year's world wheat crop below the level of demand. I'm not sure what we at FarmLink will end up recommending come Oct 31 but for now, there does not seem to be a rush to book the Basis. And whereas before I wanted to load up ahead of the deadline to stay long futures throughout 08/09, now I expect we'll scale back.

2. Currency hedges are tricky. Sheesh, it's hard not to end up adding risk instead of managing it in setting up hedges in canola, corn and soybeans. I would be interested in reading others' approaches to this question of hedging the dollar, because I get asked all the time. And when I get into the specifics of working out a currency hedge for an individual, as a fairly risk-averse advisor, I usually run into some issue that makes me back away from the idea and decide it's better just to bare-ass it (pardon the expression, I really don't know another way to express that particular approach).

How do others calculate their dollar exposure? Do you adjust the size of the hedge as the combination of changing values of the crops and the currency alters your position?

www.farmlinksolutions.ca

[mbratrud]

Hedging currancy in a situation where the US dollar is dropping in relation to all other currancy is challenging because we likely benefit from their dollar dropping anyway. To me it's not worth the Risk of Shorting USD or Going Long CDN Futures. There is likely to be money made by hedging the $ but there may be just as much benefit in being long the crop you haven't sold...

In the case of Fertilizer purchases buying today and shorting an equal amount of USD until Spring may work out ok.

I agree with previous comments unfortunalty hedging the dollar in this environment may just add to the risk who knows..

[crusher]

It's been a while since I've done a basis contract with the adjustment factor (last year). Is a positive adjustment factor good for the producer? You mentioned basis is improving, but the last basis I did in June was $8/tonne better than it is now (not including adjustment).

[charliep]

A positive adjustment (reduces the negative basis)
is a positive.

But then I have to back off a couple of paces and
explain how the CWB reports the basis. As a note,
you get the combined reported basis and
adjustment factor on the day you sign a fixed price
or basis contract. The only time adjustment is
separated from the basis is if you sign a futures
only contract - you get the adjustment factor on
the day you sign the contract but the basis on the
day you actually convert to a fixed price.

Have to work the math to demonstrate the goofy
CWB process. Using 1CWRS 13.5 yesterday, the
converted MGE December futures was $304.42.
The fpc was $291.48. Difference or real basis is
-$12.94. If you want to come up with this, you
have to add the $4.75 adjustment factor to
-$17.69 CWB basis (does equal -$12.94). So if
you signed a basis price contract or a fpc, you
have a -$12.94.

So when is the -$17.69 relevant (perhaps better
why does the CWB add this complexity)? Only if
you signed futures only contract - say last spring -
and locked in the fixed price yesterday. If you
locked in prior to August 1, your adjustment factor
would be zero. Signing a futures only contract
August 1 to now would have a separate basis each
day.

As it turns out, the basis published in the fixed
price contracts (without adjustment) comes close
to the unpublished one used in the flexpro.

I will let the CWB supporters explain why this
process. will have to do with the CWB annal
fixation on making sure benefit or cost of actual
CWB sales are included in the fixed price contract
for their accounting/risk management purposes -
not a farmer or market orientation

[charliep]

As a note, I agree with btjadenlepp on whether to
sign a basis from a strictly market perspective.

Will let the CWB argue their case in terms of risk
management strategies producer payment options
versus pooling but will note there is no way to do
365 day a year pricing outside signing a flexpro
(200,000 tonnes from the Western Producer) or a
basis contract. the implication is most farmers will
unload their fixed price contracts into the fall
(market signals as best PPO's can be described) in
the first four months of the crop year. Can be a
good thing in a falling market (maybe this year)
but was a bad thing in 2007/08 (majority of
farmers cashed out for under $7/bu/didn't take
advantage of the winter rally). If I was a farm
manager, I would like to hold some pricing (hate
the word because CWB programs do not offer
prices but rather advance set payments) into the
spring rather than forcing all my fixed payment
pricing in the fall and then relying on the pool for
the remainder of the year.

[silverback]

Charlie,

You are a trooper to help us out with these programs.

However, I trust you realize that there will never be a cwb supporter come on and try and explain ppo's and basis or adjustment levels.

Their 84 tonne's of wheat or barley go into the pool, year in and year out without a thought to anything else.

Either that or their Warburton contracts get renewed free of charge.

I appreciate your humor in suggesting they will help explain it best.

[btjadenlepp]

What we do often hear monopoly supporters say is, 'the PPO's offer all this great flexibility to producers who want more control over their pricing,' or some such spin.

To that I say, anyone who thinks the PPO's offer any marketing flexibility or control clearly haven't tried using them.

I read here recently that the PPO programs were largely developed by the Board of Directors, who haven't been allowed to use them for conflict of interest reasons. Furthermore, it's become clear to me based on some fairly hands-on research, that none of the CWB staff who manage the pricing programs understand commodity price discovery - they have no experience in it and have never looked outside their own walls to figure out how it works with other crops.

So no kidding they don't make any sense to us! We've had to re-learn price discovery from their perspective of managing cash price risk while continuing to enforce mandatory pooling. Meanwhile as Marketing Advisors we can't lose sight of how actual markets are trying to function alongside the messed-up signals we see for Board grains.

www.farmlinksolutions.ca

[Fransisco]

I looked up the definition of 'moral hazard' last night to see how it applied to the financial crisis in the States and boy does it ever. But it also applies to the CWB and what you're talking about here.

<b>Moral Hazard:</b> is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

[crusher]

So for my CPS, where I locked in the futures only, I'm stuck with a super ugly basis.

screw the cwb

[charliep]

Yes. Hopefully you did well on the futures side.

[crusher]

Priced at $360 & $407, hope they turn out to be the lowest sales of the year.