Why do farmers hold wheat to the end of the crop year?

[charliep]

In reviewing the Dec. 25 Western Producer article (page 5), a friend picked up on the following couple of paragraphs and asked me some tough questions you can help me with.

"One factor in last year's $85.4 million deficit was the unexpectedly large volume of grain that farmers delivered late in the crop year. Roughly two million tonnes of wheat were unexpectedly delivered and had to be sold when prices were bottoming out.

That led to some discussion at the board table, prompted by Flaman, about closing down the wheat account and setting up a separate pool for the late-delivered wheat under the Series C contract.

The idea was rejected on the grounds that the board had made a commitment to farmers to accept all their grain. There were also questions about the legality of such a move."

This was an interesting comment from an organization that has complete control of delivery opportunities through contract calls and terminations. The CWB chooses the time of the year when they draw grain forward. Given the drought, elevator capacity was not an issue last year.

A further comment is the fact that Canadian wheat crop year overlaps that of the US. The crop year/mid point of harvest for US winter wheat is June 1. The last 2 months of the crop year (delivery year if you like) and 4 months of the pooling year are sold in competition with new crop northern hemisphere winter wheat.

Back to my question. In the case of spring wheats, why do farmers hold crop into the last quarter of the crop year when there is no capacity constraints/there are delivery? Did this happen last year?

[TOM4CWB]

Charlie;

Wheat was held back to the May Series C for a number of reasons.

1. The CWB does not allow me to offer them grain in Feb, March or April... not till May 30th.

I must have decided by Jan 31st... many times we have seed and feed issues that don't allow us to commit all supplies by Jan 31, really only 3 months into the CWB marketing year which nomally starts at the end of October... not August 1 as it appears.

2. The CWB held grain hoping that a rally late in the crop year (Sept Oct) would bring prices up... and this did help some for the 02-03 pool. Dec 03 prices would have paid the deficit off, or close to it, from the charts Brian White showed us.

3. The CWB itself needed to deliver 2mmt between June 1 and Oct 15th to our long term customers... this was simply a consistant supply being metered out fulfilling the commitments of a stable long term supplier.

4. Tax planning and swithching to the following pool are benefits the CWB system create... and better financed farmers like these options for risk management and tax planning purposes.

Hope this helps a little!

[AdamSmith]

Why do farmers hold wheat to the end of the year?

It's because they can.

When I was harvesting my 2003 winter wheat crop, I sold about 25% right off the combine. I was delivering my last load in the morning of July 30 or 31 and there were a number of single axle trucks in the line up delivering 2002 spring wheat.

I sold my winter wheat in the non-board cash market which offerred me an incentive to do so. The single desk system paid the same whether delivered Sept 02 or July 03.

Why start trucks and augers when it -20 and when you have to spend hours cleaning snow out of yards? Why hauling grain during seeding and spraying when you can wait until July to haul? Farmers know the grain has the same value in July as in Jan. and the delivery process is oh so much easier.

Although it's not politically correct to say so, but there are many farmers out there who are not in financial stress and it makes little difference to them whether grain is delivered early in the crop year or whether it's delivered on the last day of the crop year.

The single desk system created these attitudes towards wheat marketing and those who don't know any better will always harvest wheat in Sept. and sell it in July.

[charliep]

I just want to pick up on your point number 3. Long term supply agreements combined with forward delivery is a normal part of business. However, this does have a cost if you carry grain (including wheat) into inverse markets. Because of the difference in crop years between winter and spring wheat, this is often the case for wheat.

As Art Macklin points out in this article, the CWB is disciplined seller that moves out an average amount every month. This has varied from 1.5 MMT/month in the 1980's and 90's to 1 MMT/month in last 5 years to 500,000 tonnes a month in 2002/03. His argument is that this is the best way for farm managers to handle their price risk in their business.

Are there opportunities for the CWB to manage price risk other than being an average volume merchandizer every month? Should the CWB be able to front end load sale volumes in a year like this last one rather than just being a seller of average volumes every month? How would the CWB operate differently if they had to compete in open market setting either in Alberta or across western Canada?

[Ration-Al]

The existing CWB delivery policy puts no value on time of delivery hence AdamSmith's point that farmers will harvest in August and deliver in July.

As an example the 40 tonne delivery opportunity given to farmers at harvest has some intrinsic value. If a farmer chooses not to utilize that opportunity the value is forfeit. What if the farmer had the right to sell that opportunity. Likewise with all other delivery opportunities. Then a farmer who wanted to cash out his entire crop at any given point in time could do subject to the basis cost of acquiring those delivery rights.