CWB Early Payment Option

[charliep]

How many of you have used the early payment option in the past? Will you use it this year? Why or why not?

[charliep]

Just a couple of further comments.

1) Cashflow will be a critical issue this fall. I had one farmer comment this has been the most expense crop he had ever put in (nitrogen fertilizer cost). After effects of 2002 drought. Finally, decisions around calves/cows this fall.

2) The early payment options are effectively put options (plus enhanced cashflow) with strike prices 10 and 20 % below the last PRO. The cost of the premium is posted on the web for wheats and malt barley (surprising not feed). http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/2003_index.html.

3) The premiums can in some sense be used to access the risk the CWB sees in these transactions to the overall pool. As an example, the cost for 1CWRS 13.5 is $1/bu (0.5 % of the July PRO) at the 80% EPO and $2.50/t at the 90 % level (1.25 % risk premium). Feed barley (not posted but can be gotten off by phoning 800 ASK 4CWB) premiums are $1.50/t at 80% EPO (1 % of the PRO) and $5.75 at 90 % (4 %). Higher premiums relative to coverage would reflect the CWB sees higher risk under this program for feed barley than wheat.

4) I would be interesting to see how the CWB covers risk on the barley EPO. If they use futures, the market is thin enough that their trading activity could have major impact on the Western barley futures.

[charliep]

Just a note for everyone to read the article entitled "CWB offers relief from low initials".

I find it interesting in that it may be an indication of the future - the federal government covers off the first 65 % of the PRO at port and then the CWB/pricing pools take on the next 15 to 25 %. Contingency funds will have to be increased substantially and a different approach to risk management by the operations side of the CWB.

[charliep]

The article is in the August 14 issue of the Western Producer.

[charliep]

This whole CWB board thing is getting crasier and more risker every day with them trying to keep up with the open market. They can't do it the way that they market ( which always gets the the worst price possible, you can't do any different when you market grain every day of the year.) Farmers would never market grain every day of the year to obtain a worst price quarntee.

Farmers don't need the CWB anymore, it was setup so government had control of all edible grains. The government still controls it all to the finacial ruin of alot of Western Canadian farmers.

[carebear300]

Kernel I don't want to sound like I am sticking up for the wheat board(not usually my style) but the free market isn't working so good in the beef industry right now. No such thing as a free market when governments have that much control or influence. Just my observation. I am a mixed farmer grain and beef cattle so get it from both directions every year. Getting dam tired of it!!!!!!!

[charliep]

Today's Producer Direct Sale price for feed barley is $175.56/t instore Vancouver. This is an accurate reflection of current international barley prices. The premium for the 80 and 90 % EPO is $1/t and $3.75/t respectively.

[NeilS]

Charlie

You asked "How many of you have used the early payment option in the past? Will you use it this year? Why or why not?"

I have not yet used the early payment option, and by the way the numbers look, am not likely to use it this year.

Firstly, from a guaranteed payment perspective (the put option, as you call it) it does not look very attractive. The 90% EPO on 13.5% protein CWRS, for instance, currently offers $180.90 per tonne. The final payment for this reference grade over the previous 9 years has never been below $192, and the average over this same period is $221. Given the difficulties in Europe and the tight world stocks, I expect final pool payments to be above this average.

From a cash flow perspective, it looks no better. The above example will pay an additional $42, at a fee of $2.50. This comes to a financing cost of about 5.6%, slightly below my current cost of funds, but one interim payment will wipe out this advantage.

In short, not worth the bother.

[almoy]

Used the EPO on half of my HRS wheat last year. Should have used it on all of it ! Will probably use it again this year.

[charliep]

Would the answer on the EPO be different if the PRO was $300/t and the 90 % level was $270/t? What the reaction be if the premium/discount was increased to $10/t or more?

A note I wouldn't be holding my breath for early adjustment/interim payments. After this last year's deficit (or close to it) in the wheat pool, I suspect the federal will not be increasing initial payments unless they have 100 % guarantees of a total payments. The new world is cash flow needs will be met with the EPO program. In this world, the CWB will have to change the way they handle pooling risk - the taxpayer will not be put at risk.

[TOM4CWB]

Charlie;

The Canadian Tax Payer has a unlimited supply of cheap high quality grain, provided to them by the CWB.

So in exchange, why shouldn't the Western Canadian farmers get a fair price for our CWB grain?

The CWB is ripping us off on CPS, CWRW, all these are priced below feed wheat price... and the CWB feed wheat price is about $1/bu below market price... what gives here?

CWB blunders should be paid for by tax payers, since the benefit from cheap prices, shouldn't they Charlie?

Is there any wonder why American farmers are Mad at the CWB, and accuse them of unfair trading?