CWB Basis Contracts

[TOM4CWB]

Charlie;

One of my neighbours took out a basis contract in 2002-03, and had not priced it out.

To cancel this basis contract, the CWB quoted him $62/t for CWRS, and went through a endless mirage of complicated transactions, including futures transactions, to arrive at my neighbour owing the CWB the $62/t.

How can the CWB be charging farmers liability for a futures trade the CWB on their own decided to do?

How can these even be called basis contracts, when if you do one, the CWB takes a futures position, even though the farmer did NOT authorise the futures trade?

[charliep]

Anyway to briefly go over how the CWB calculates damages for both PPO and basis contracts? Is this clearly explained in the contract that was signed? Available on the web?

[rain]

How many times did your buddy role his contract? Why did he wait till now to get out of it? Tom give us some more information. Sometimes you come across just like the media. Big wide open statements that just have enough information to get people excited.

[TOM4CWB]

Rain;

Regardless of rollovers,(I don't know how many) this is what I see:

The CWB says they are;
Modifying how damages are charged to farmers who are unable to meet the terms of their PPO contracts – administration costs will no longer be charged on a per-tonne basis; they will be $15 per contract transaction.
Liquidated damages

The CWB Fixed Price and Basis Payment Contracts contain a performance clause. Farmers must deliver all of the grain signed up. Liquidated damages will be assessed for not fulfilling contract obligations (i.e. non-delivery). A farmer may be assessed two types of liquidated damages. Pricing damages are assessed on the pricing contract and delivery damages are assessed on the corresponding delivery contract. Delivery damages are on the separate delivery contract for the same tonnage
There are provisions to aid in controlling liquidated damages: transfers and buyouts.
Pricing damages
FPC and BPC require 100% compliance and pricing damages are assessed on any shortfall of tonnage not applied to the contract is subject to pricing damages. This includes both priced and unpriced tonnes for the basis contract. Pricing damages are charged if a farmer fails to deliver to the contract by the end of the crop year.
Pricing damages are calculated using the contracted values (futures, basis and/or fixed price) plus the current futures and basis. The liquidated damages are $15 per transaction to cover administration, but may be higher due to current market conditions and the Pool Return Outlook.
The intent of charging damages is to ensure that the program is not being used for speculation. Arbitrage opportunities will be measured to assess the value of switching to a higher basis level and switching to the pool account. As well, any losses in the futures position need to be accounted for.

Rain;

The… “but may be higher due to current market conditions and the Pool Return Outlook.” Seems to be the problem.

The CWB can force my friend to deliver, take the loss, the CWB then charges the federal government the initial price, and pocket $100/t to the contingency slush fund the CWB has. This was never the intent of the PPO programs, to build a CWB slush fund to cover off CWB blunders.

Just how much of the contingency fund will end up paying for the pool deficit this year?

Is this a fair way to treat those who attempt to mitigate risk?

How many farmers understand what they are getting into, if I cannot even logically understand what the CWB is doing, other than stealing from those stupid enough to get sucked into doing these contracts?

Any other marketer who would dare to try this in non-board crops would be run out of the country, wouldn't they Rain?

[charliep]

I scanned the CWB web site to see if there is an explanation as to how damages are calculated on basis/FPC contracts. Thought one used to be there but couldn't find.

1) Was a information provided prior to signing contracts about potential damage charges from not filling the contract? Did the farmer sign the contract without seeing this?

2) Was a clear explanation provided of the terms of the contract/potential penalties for not filling at the time of signing? Is this information provided with the contract?

3) Were the consequences of rolling a hedge into an inverse market (likely the case most of this spring) clearly explained to the farmer when this decision was made/executed? I go throught this later point somewhat tonque in cheek as the PPO is not based on an individual futures month but rather a calculated value for the pooling year as set by the CWB.

[TOM4CWB]

Charlie;

Your Point 3 sums up the problem;

The CWB creates the liquidation values out of thin air, and charges the farmer no matter what, even when a $30-40/t futures profit is involved. The CWB figures they can profit on both sides of the equation, without an objection from farmers? Further, how can anyone figure out what the CWB will do, as they do not use commercially traded competitive numbers (diciplined be the commercial market place) to create the liquidation values used in the buy-out calculations.

The CWB forces my neighbour to buy wheat and fill his basis contract, when every tonne to be delivered drives the pool accounts deeper into deficit. Is this ethical?

How can the CWB claim to be operating a responsible and commercially accountable system?

[charliep]

Before I get into more questions, I would note Rain's comments about carrying a basis contract this late into a crop year. From personal experience, a first loss is always a best loss.

From there I am trying to think how basis contracts are handled in a non board market. If basis widens, companies are more than happy to wash a contract (they can buy cheaper in cash market). Opposite answer if basis narrows.

Basis stays the same and you roll a contract to next month assuming a market with carry (next futures contract higher by something under interest and storage) - you eat the carry (basis widens by amount of carry in the market).

Inverse Market (further out futures less than nearby) - basis signed in the contract stays the same but farmer takes hit of lower futures price. If a farmer chooses not to price out futures side (grain company would have to give up delivery side), hit would be narrowing of basis (if it occurred) plus administration.

This is my understanding of how the open market works. How are damages for non performance on CWB producer pricing options calculated?

[rain]

Tom know one has proved the CWB makes no sense better then you. There is know reason to go on about this.

Why did you neighbour wait till now to decide he could not fulfill his contract. No offense Tom anybody who knew in the fall he had no grain and waited till July to say anything deserves all the grief he gets.

What was this guy thinking. It is hard to feel sorry for someone who has put themselves in this situation.

[TOM4CWB]

Rain;

I wouldn't say anything about the CWB BUT;

I HOPE the CWB can start practicing what it preaches, and begin returning a FAIR deal to those who use PPO options.

My "BUDDY" as you called my neighbour, and the Lord knows I have many neighbours, had some March 03 Basis left that he had no grain left to fill, and as you know, since the CWB did not call much of the grain till this spring, we can't figure out exactly what is left till we clean out our bins.

My "Buddy" did one roll, at the end of Feb, as anyone with a basis would do, and was unpriced. when settlement was called, there was only $1/t difference between a basis liquidation buy-out, or pricing and buying out buy getting grain from another neighbour, which is illegal under the CWB Act, but what the CWB is encouraging PPO contract holders to do. So my neighbour priced out, and will pay close to initial price to someone else, and the CWB will claw back some $60/t from my "Buddy" at some later date.

The CWB will claim, that the real income from this wheat is the final pool price (in this case this year the initial) sell this grain for $60/t below the initial, pocket this $60/t or so from my "Buddy". I figure for a total of about $100/t or so profit from this transaction, all to the credit of the CWB contingency fund.

At the end of July 02, it was a real shot in dark to what "Buddy" had to contract, and the CWB's refusal to ship 02 harvest last fall is not my "Buddies" fault, it is the fault of the CWB contracting system that drags out delivery of these contracts over 12 months.

People must be aware of what the CWB is doing, or how will we ever change it and make it better Rain?

[charliep]

Two questions here. The practicalities of rolling any basis contract. My observation is that 9 times out of 10 it works against the farmer. I won't even comment about rolling a basis contract in an inverse market (futures nearby higher than deferred months).

The issue is to have a clearly understood process and a farmer who knows their obligations and alternatives. As soon as the farmer knew there was a shortfall, they should have been taking steps to reduce their basis contract volume. The process of how the CWB calculates these basis buyouts is the interesting part and where the money goes after this.

If the farmer had a committed price above the CWB PRO, would the CWB have paid the difference for the shortfall on basis contract volume. I realize the obvious answer is you would go to a neighbor and have them deliver on your contract.