Fpc & Initial & Final

[disker]

Just a thought about the FPC and intials. I am upside down on my Fpc's so I have to give back to the level of the intial. Now let's say the board got a little carried away with the initals, to compete against FPC's, not look bad against US markets etc.
What if 1HRs inital @ 325/tonne
My FPC @ 250/tonne
Final comes in at 315/tonne
I haul a load anytime between now and July 31 I get 325/tonne and send back 75/tonne to net me 250/tonne. Joe pool guy gets 325/tonne and feds make up the difference (10/tonne overpaid) at the end of the year, or does the loss come out of contigency fund because FPC's participants caused massive lossed to the CWB. If this does happen do I get 10/tonne sent to me to equalize the mistake?? HAHA
Is my math correct in this?
Curt

[TOM4CWB]

Disker,

The real issue is that you have the right to settle for the pool... and pay out July 31 on the liquidation damages.

Common sense would mean that a grower would delay the FPC delivery to the end of July... then make the decision that costs the least.

You can lock in $364/t on an 07-08 EPO right now.

If prices keep dropping like a rock... it will be much cheaper to pay liquidation damages... when we switch to the Sept futures in July.

[charliep]

disker Your assumption is there will be a deficit on the 2007/08 pooling year?

TOM4CWB. You always ask good questions that make me think.

I'll start off with the comment it is not a year I would carry wheat unpriced into the new crop year. I think the inverse in the new/old crop will stay and if I were optimistic about prices, would spend my money on calls.

So if you are pricing into the old crop pool, spending the $9/tonne on a 100 % EPO is likely a good risk management investment.

What really got my curiousity going is the change in EPO premiums pre and post May PRO. Will note the 100 % 1CWRS 13.5 EPO cost on May 21 was $30.75 (PRO $388). On May 23, the 100 % EPO cost was $9 (PRO $373). You can put $6/tonne more money in your pocket today than prior to the May 22 in spite of a $15/tonne decline in the outlook. Interesting note as a mechanic/observer of the system.

[TOM4CWB]

Charlie,

This system is as goofy as it gets... but they are the ones making up the rules.

THe basis being charged is just plain extortion... leading to the rest of the system that makes just about as much sense from a logical standpoint!

tHAT THE CWB HAS not got us a cash pricing system... that works... is absurd!

What a price we will pay.... when we practice to deceive!

[disker]

Tom and Charlie,
If you phone and ask about your buyout you will find that it will not matter how much prices fall because they are accounting for that. I checked and it is the GREATER of futures to futures or net price to net price with an adjusted basis. You have to give them the contract #, they look up the day you signed it up and then use the spread between Dec futures that you signed and the July future (current pricing future) on the day you signed up, this may be a year ago. This spread is then added to the July future to make the future to future buyout. It can also be the greater of a straight price quoted from the CWB, which is basically the PRO because it is the futures price with an adjustment factor based on how much of the pool is priced, now the pool is nearly priced so this value is not going to drop much and it is soley at their discretion.
My point is I would be terribly cautious about waiting to buy back your contract!
Curt

[charliep]

disker/curt

Just curious why a farmer wouldn't just deliver on the fpc/collect the initial payment realizing that they are being overpaid. The calculation is easy then - the initial payment for the grade and protein is $X. The actual price based on your fpc is $Y. The difference you owe is $Z (won't change unless there are adjustment payments that impact spreads). You would then either pay the CWB the amount of overpayment in October or instruct the CWB to deduct from the final payments. To me, buying out of the contract is adding more expense and putting someone at risk of the CWB bugger factor

[btjadenlepp]

On the 100% EPO change Charlie notes above, it sure doesn't make sense as a cash price signal to farmers but I think it's due to a further out-of-the-money (cheaper) put used to underwrite the program at the lower PRO level.

[btjadenlepp]

We are hearing of cases where farmers are having the balance deducted from other CWB payments against deliveries being made now, of different classes than the overpayment is due against, fully 6 months before the payment is due.

For example, suppose you have winter wheat and spring wheat in the bin, and you're delivering winter wheat now. The CWRS was priced at a discount to the current initial, generating a letter, and the winter wheat was priced in Feb at a premium to the initial, generating an addiitonal payment upon delivery. The top-up on the winter wheat may be getting scaled back by the amount of the overpayment on the CWRS.

www.farmlinksolutions.ca

[charliep]

Brenda - likely how risk handled but sure provides strange signals as you indicate.

disker

Have to admit to being confused by the process for calculating fpc overpayments so have to think through by putting down on paper.

Lets use an example of a farmer who delivers 100 tonnes of 1CWRS 13.5 wheat on June 1 and collects $327.85/tonne minus CWB deductions. The contract was locked as fixed price contract at $283.90 on October 15.

Web site to know prices that day: http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/fbpc-wheat-2007-mhrs-20071015.html

Their overpayment should be $44/tonne. Difference initial 1CWRS and contracted price. Have I got this right?

Not trying to complicate but interesting to note what what the difference is on alternative strategies (realizing in hind sight). Lets say the farmer locked in a basis price contract on October 15. July basis was $28.67 over minus the $12/tonne adjustment. Lets assume the farmer pulled the trigger yesterday (July futures - $374.27) or a locked in FPC of about $390/tonne. This price would be $100/tonne above the October 15 price but $100/tonne below the combination bpc/futures price levels in March. A $200 plus swing in prices.

[charliep]

Curt/Tom - Am very slow today.

So I guess you would have to compare the cost of your buyout (plus maybe a 100 % EPO premium if want to ensure the PRO) to the amount you have to send back to the CWB after delivering on the FPC. Will the CWB let you do this? Seems like lots of paperwork/cost.

[TOM4CWB]

Disker,

In the 15 minute explantation I was given... I was told the liquidation damages will be determined by a reconstructed futures figure... if this was Sept 09 upon settlement... a Sept 09 hedge cost would be created.... and that Sept 09 value subtracted from the July 31/08 Sept 09 futures value;

OR,

The Fixed Price I locked in at... deducted from the Fixed Price Contract value as the calculation point... if it was July 31/08... then that value...

The CWB charging the greater of these two values... as the liquidation cost to settle the contract.