Cash Pricing Wheat

[Ration-Al]

If elevators in Western Canada were to offer a daily cash price for hard red spring wheat, would it be priced off of the Minneapolis commodity exchange wheat futures?

[charliep]

Hope you don't mind if I divide your question in two parts.

The first is how grain is priced to final customers/end users (domestic processors and import buyers). A general comment is that there is not that much difference between what the CWB does and the private trade. A customer steps forward looking for some grain (wheat/barley). Their offer (for the most part) will be a US futures market adjusted for a basis to bring to a port position. There will also be adjustments for percieved quality factors and differences in freight rates to get to their facility. Because we grow spring wheat, Minneapolis is the most relevent futures although Kansas City (hard red winter wheat) is the pricing reference for some customers/grades and Chicago (soft red winter wheat) for others. The sale/pricing process from a customers standpoint will be the same in the case of both the open market and a single desk market.

The other issue is how price signals are translated into the daily pricing/payment signals that farmers recieve. In the case of an open, your price signals/sales values will be based on Minneapolis (for the most part) minus an appropriate basis (similar to what you have for canola and barley today). The signal would be more direct and would change day to day reflecting market conditions. In the case of the CWB pricing pool, your prices are based off average sales values for the whole crop year and the spreads/other adjustments the CWB applies to the overall returns for the year.

What are farmers fears around moving to a more open market situation for wheat and barley?

[TOM4CWB]

Charlie;

THe big cloud the CWB always brings us is that "premium" markets like Japan and the EU will be lost to overly aggressive multi-sellers knocking the bottom out of these premium markets.

Japan is considered our premium market for Canola as well as wheat.

Interesting that we must remember in an open market, if an aggressive seller sells too low, and farmers refuse to sell at the discount price... the discounter is out of business in short order as they will have no supply for that sale.

I would be most concerned about the CWB being the worst discounter in an open market, if they keep pooling as the base for a sales strategy... once grain is contracted to the CWB it may be tempting for the CWB to undersell the market.

[Ration-Al]

What kind of premiums does Japan pay for Canola and Wheat? I know that the premium that Japan pays for wheat to the CWB is not readily available but perhaps the premiums that Japan pays to other countries for their wheat might be available. Certainly someone must know what kind of premiums Japan pays for Canola.

[Ration-Al]

Charlie,

I see that the CWB PRO for 1CWRS 13.5 is $195 per tonne (website). I also see that the CWB asking price for 1cw Wheat St. Lawrence is $247.15 and finally I see that Minneapolis March Futures closed on Tuesday, December 9th at $3.965 according to the Toronto Globe and Mail. How would you rationalize these three numbers?

[charliep]

Ration-Al

Actually the prices for the different types of CWB sales (including Japan) are reasonably easy to figure out.

To look start the discussion, I will get you to have a look the AFRD website - weekly crop market review.

http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sdd6248?opendocument

About 2/3 of the way down the page, you'll see the section world and US cash prices.

Wheat prices will give you some answers to your questions. The CWB prices are their daily posted prices and reflect their offering price to best customers - actual sales prices will be lower depending on who the customer is.

If you compare the CWB Vancouver price to Portland and come up with an approximate Japanese premium. No posted price for 1CWRS 13.5 ptn (CWB Vancouver) but the previous week was $267.03/t. Portland was $234.55/t. The difference is about $32.48/t or about US $25/t. The US price is a good historical benchmark. The premium is paid for having access to the best quality wheat produced in Canada and a commitment to filling Japanese mill needs on a just in time basis.

The $247/t St. Lawrence price should be basically similar to a Portland price with a bit of a premium for European markets.

The US $3.985/bu is the March MGE futures price (today). As with most futures, there is a basis adjustment to a futures price. The cash market today in Minneapolis (representative of spring milling wheat prices - 14 % protein) is between $4.25 to $4.53/bu (not exact because of quality differences). Convert the mid point to CDN $/t and the result is $210/t. This price is the basis for pricing to North American mills (adjusted for differences in location and in the case of the US their tariff on our wheat).

The $195/t is the port base Pool return outlook forecast and reflects the total value of sales during the whole crop year across all classes of wheat (ex durum), grades and proteins. Adjustments are also made for locations and other pooling issues such as the freight adjustment factor.

[Ration-Al]

Charlie,

Thanks for all the information. I do want to understand all of this. The St. Lawrence CWB price is posted in the Toronto Globe and Mail. Where do you find the Vancouver CWB price?

[charliep]

Will have to check where the price off our web site is posted elsewhere on Monday. They are both on a document called the CWB card price but I am not sure where can be found in the public domain.

Interesting that I looked in the western producer and many of the international wheat/barley prices are published weekly (page 14 Dec, 11 issue) but not CWB posted prices. There are many including the export prices we are talking about and domestic milling wheat prices.

[Ration-Al]

Charlie,

You are saying that Japan pays a premium of $32.48 per tonne or about $0.88 per bushel for just in time deliveries of quality Canadian Wheat. Can't they get the same quality and just in time deliveries from US and Australia? Would the have to pay that kind of premium for similar service out of the US?

I heard someone say that a Japanese delegation came to Canada last year because they couldn't believe that Canada could not supply them with all number one wheat. They actually went out to elevators to confirm this.

[charliep]

Just a couple of comments.

1) I am not sure the Portland price included here is a Japanese specification or would require extra premium. As an example, Japanese Ministery buyers are very sensitive about fusarium/DON tolerances. Would have to check but I think the standard contract can have up to 1 % fusarium head blight damaged kernels. Japanese specifications are much tighter and they will pay for.

2) The Japanese are very much relationship buyers. These relationships last for long time periods provided the seller doesn't do something stupid. This is not to say the CWB is the only Canadian organization that has these relationships - grain companies (at least one if I remember right directly and others indirectly through accredited exporters for wheat as well as other commodities like canola).

3) Why do some buyers pay more? Maybe an example is in order. You and I both go to town to buy a new car. Functions are identical (go to town, car for spouse/kids, etc.). I buy a base Taurus for $24,000 (don't know if this is in the ball park). You buy a Taurus as well for $30,000 (leather seats, moon roof, the whole 9 yards). Why did we pay different prices for essentially the same car? You wanted more options and were prepared to pay for them. You can have your own reasons for needing the leather seats, etc. Japan has higher quality/delivery timing requrirements and is prepared to pay.

Ration-Al. I turn the question back to you. Do you know what happens to the benefits of the Japanese contracts in terms of pool returns and the logic for it?

[charliep]

Should have read your question better. In terms of hard red spring wheat, we have the best quality/most consistent grading standards as compared to the US and Australia. This is for sure the case for Japan keeping in mind they are very specific about quality/milling characturistics and the CWB/grain industry is prepared to cherry the system to achieve this quality.

Your comment about the delegation is actually an annual event. Their are regular delegations that visit Alberta/Canada from government and industry. They are relationship who like active communication and dialogue. Japanese are also diggers for information. Finally, it doesn't hurt western Canada has some golf courses.

[TOM4CWB]

Ration-Ai

Brian White of the CWB was asked this same question in Nisku C to C Mtg.

His response was that the typical premium was in the $15-25/t range for the Japanese market.

We should remember that unwritten trade balance issues between JAPAN and; Australia, The US, and Canada...

means that a balance of imports of grains from us as wheat producing countries is part of the Japanese food procuring system.

What I am saying is that Japanese exports of Cars, Computer parts etc. and access to our markets is VERY Important to the Japanese.

In realisation of this, and since Japan can afford to pay more for an assured just in time grain supply, this is a simple way of greasing the wheels of trade, and keeping the high cost of local Japanese storage and grain handling to a minimum.

Obviously since we import so much from China, now, this same type of relationship with China will be developed over time. Wheat for TV's, DVD players and clothes.

[Ration-Al]

The premiums from the Japanese contract go into the wheat pool account and are ultimately returned to producers.

Since the Japanese normally only purchase #1CWRS do those premiums go entirely to the producers who sold #1CWRS or are they somehow diluted through the spreading process with other grades and classes of wheat?

I would say that my farm has the right through the pooling system to a proportionate share of the Japanese market. That would be true in a pooling environment or in a competitive open market environment although I might have to fight for that share. We should in fact be able to quantify that share on a theoretical basis. The problem is that in order to receive my "entitlement" I am also forced to accept my share of all the other markets in the world. This is the rationale for "pooling" or at least a part of it.

What if I do not want my "share" of the Malaysian market for example or the Iranian market. What if I would voluntarily either not grow that wheat or store it into the next crop year? Could I customize my "PRO" be growing less wheat? I could let some of my land go idle. Seed it to grass or grow other crops.

Somehow the sale price of wheat must relate to cost of production. I know that customers do not give a r**ts *ss what my cost of production is. The world is supposedly a competitive environment for grain sales but with the US and EU subsidizing and pushing commodity prices below cost of production we are all going to go broke eventually.

[Ration-Al]

Yes Tom,

Wheat for DVD players and X-Box games. And going forward wheat for India so they can operate our call centers and do our bookkeeping.

China and India have billions of mouths to feed and their economy is beginning to boom. They are doing all of our manufacturing and will soon take the burden of many of our service oriented jobs as well. China is today driving the cost of ocean freight from $25 per tonne up to $55.00 per tonne with their demand for coal and iron ore. They are graduating 345,000 engineers per year. What do you suppose 345,000 engineers will do with all that coal and iron ore?

Sure China will have the money to buy wheat and we will have lots of wheat and barley to sell them. But how many DVD's and how pairs of Nike shoes will I want to buy? There are a billion of them and only 30 million of us.

[charliep]

Ration-Al

The premiums paid for Japanese (and to some entent UK) wheat are returned to all participants in the wheat ex durum pool (not just those who grow 1CWRS 13.5). Similarly, the pain of selling into discounted/low value markets is shared by the whole pricing pool - not just the class/grade that was sold at these levels).

To much stuff in here/I apologize for ranting but you have hit a sore spot. Everybody asks me what a new more open wheat/barley market would look like and the impact on the pricing/delivery signals they would get. At the same time, they don't have a good handle on how the current pooling system works.