This is what I've been talking about

[bucket]

Here is the sad part of the story.

Had the cwb been paying farmers for storage instead of the grain companies for the last 60 years the whole industry would be better off.

[jdepape]

you're absolutely right - a terrible misuse of the whole grain handling system.

[mcdon]

JD,

Re your book, how did you address the issue of VSR ?
Could be a whole chapter in itself,

[jdepape]

When we redesigned the canola contract we were
grappling with the issue of convergence - same
issue CME was addressing when they came out
with VSRs.

When designing futures contracts with physical
delivery, the trick is to make delivery against
futures (leading to storing grain) as attractive as
shipping grain (meaning turning inventory) - or at
least close.

When we redesigned the canola contract I lobbied
for large storage rates - I suggested 0.15/t/day.
The exchange went with 0.10 and later increased
it to 0.12. (I'd still vote for 0.15 - or go with VSRs.)

The more carry you can get into spreads, the less
will end up in basis. And that's a good thing.

VSRs do the same thing - but only when needed.
I like the concept.

Great topic for a second book.

[jdepape]

VSR = Variable Storage Rates

[blackpowder]

great topic. what aville is for.
on a lighter note. i told my banker to hold her breath
until march next year.

[bucket]

Did they get her to the hospital in time??? She should have stroked out on that comment!

[mcdon]

There should be an equilibrium point with respect
to the amount of carry in a spread, too much and it
discourages a long position that is rolled forward,
e.g. when VSR was introduced it served to push
spreads to excessive levels, I remember buying the
U/Z spread at 50 cents. extrapolate that over the
course of a year and that is $2.00. For a fund
carrying rolling a long position, it makes it almost
impossible to realize a profit. Extrapolate it over the
course of 5 years and the long owns$17 wheat. This
was the death knell for Duetche Bank. On the flip
side, this is where the strategy of capturing the
carry in a spread works for a short position. VSR
wouldn't work for canola, no guarantee that basis
would narrow, not enough competition in market.
Expecting basis to narrow is giving grain cos. more
credit than they deserve.

[jdepape]

Average canola basis has gone from -70 in Jan to
-32 today.

Who do you give "credit" for this price increase?