Fixed price or basis contracts

[craig]

A quote was made in the Producer that very few producers use these pricing mechanizms offered by the board. Are we missing something or are we seeing what I suspect. I have serious reservations about an organization whose very existence depends on price pooling administering a program based on the open market. It would seem that the number 1 priority would be to make sure that these contracts never looked better than the pooling option. I would suggest that if you simplified the program by determining a set basis with a currency conversion (Ontario model)and ran it year round then I would think you would have a lot more producer participation. We would have a good risk mangement tool and the board would have their grain.

[charliep]

Good topic. As a note, the details of the 2004/05 producer pricing options are supposed to be announced tomorrow.

An interesting thought I had coming out of grain world after hearing the crummy malt barley PRO. I was tempted to ask the moderator (Steve Gorst/Canada malt) how much new crop malt barley he would book he were offered a price of $2.85/bu ($176/t port minus $46 Alberta deductions). I then should have asked Bob Cuthbert (CWB barley trader/presenter at Grain World) where new crop malt barley would be traded at today).

My wild idea is for the CWB to facilitate forward contracting by farmers directly with maltsters/exporters at the agreed to new crop price. Farmers would get whatever forward price the maltster was offering but would also be responsible for hitting the maltsters quality specifications/be financially responsible they can't. The malster farmer relationship would be more direct so they (on their own outside CWB requirements) may negotiate an act of God clause.

What are others innovative ideas?

[carebear300]

I think it sounds like a good idea charlie. Not a chance that any of our elected representatives on the advisory committee would ever go for something that simple and straight forward.

[rain]

Charlie isn't feed barley going to be about 170 with corn futures at $2.90 and the exchange rate of 1.35.

[TOM4CWB]

Charlie;

The exact mirror of what you just test floated on malt barley was offered to the CWB last year by the maltsters... and was turned down flat. That is your answer.$3.85/bu malt barley for the 03 harvest... act of God clause... the whole works.

Instead the barley will be grown somewhere else... or we can get on the malt lottery merry go round... and be low quality suppliers of malt barley on short barley years... as high quality goes to the feedlots.

[charliep]

Just a note the details of the 2004/05 CWB fixed price contracts have been announced today.

enhancements make payment options easier for farmers to use

Winnipeg – The CWB's farmer-controlled board of directors yesterday approved enhancements to the Fixed Price Contracts (FPC) and Basis Payment Contracts (BPC) that will make both programs easier for farmers to use.

The most significant change is the extension of the sign-up deadline for the FPC and BPC for wheat and the FPC for feed barley and durum wheat until October 31, 2004, a full three months later than the July 31 deadline that had been in place since the programs' inception. This enables farmers to choose a fixed price or basis level later in the crop year. The CWB will adjust the basis to reflect the change in risk resulting from sign-up after the start of the pool year.

"By extending the sign-up deadline, we're giving farmers more options," said Ken Ritter, chair of the board. "Most years, you'll have your wheat and barley in the bin by October 31, so you'll know exactly the quantity and quality of your crop. This makes it easier to decide whether to stay in the pool, choose a locked in fixed price contract or take a basis contract which tracks the highs and lows of the market."

The 100 000 tonne limit for the durum FPC program will be maintained and a 200 000 tonne limit for feed barley will also be established.

The enhancements follow a series of consultations held with farmers on how to strengthen the Producer Payment Options (PPOs) and build on the work done since the PPOs were first introduced four years ago.

"We are committed to providing farmers who want these payment and pricing options with greater flexibility while maintaining the advantages of pooling and western Canadian farmers' marketing clout by selling through the single desk," Ritter said.


Thoughts?

[charliep]

Fixed price offering/new crop basis levels have also been posted.

http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/2004_index.html

No real comments except they are at the conservative side of expections.

[charliep]

Further thought. What isn't there a producer pricing option for malt barley? There is no visible outside market to hedge durum on and there is a PPO. In the case of feed barley, the CWB has the alternative to use western barley but in reality would suspect it wouldn't be used that much.

[timm]

why not put remaining wheat into 04 crop year on a dec basis contract.(would be 222mt approx.)with aug payment in full.

[charliep]

timm

Your idea from today's environement has merit. However, it highlights a flaw in the current system. My assumption is that you will store/deliver in July and then put on a storage ticket. Is the grain contracted on the "A" or "B" series? What happens is there is an early termination and you are forced to deliver? If you have not contracted, what happens if there is no "C" series accepted (similar to Prairie Spring last year)?

The other market signal is to look for inverses in the market. Chicago Board of Trade (soft red wheat) has a small amount of carry right into new crop.
Kansas City Board of Trade (hard red winter) has a small inverse between May and June - otherwise has a small carry. The highest prices for Minneapolis Grain exchange (hard spring wheat) is in the nearby months with May 04 a 10 cent premium to most further out months. An inverse is normally a signal to deliver and price early.

Putting it another way, the current system doesn't allow you to price unless you play the game you are suggesting with the risks attached. Lots of deliveries late in the crop year is not necessarily good for pool returns in the crop year. Access to an open market or 365 day a year CWB contracting opportunities is the only way around this.

The suggestions around early shut downs of pools/multiple pooling periods will also have major implications for how farmers approach this decision.

Others thoughts?

[TOM4CWB]

Charlie;

The last PRO in Feb suggests the CWB has priced the rest of the 03-04 crop... as the PRO did not rise.

WHat does this mean?

We told the CWB in Dec. 03 at the C&C mtg in NISKU that their projections for a declining wheat market were out to lunch... which were exactly correct.

The 04-05 PRO confirms that the CWB refuses to market our grain in a positive manner... they indicate a give away later in the year, with a $201/t PRO and a cash price of $222.

A cash price is the only way to resolve this issue, and the CWB knows this... but refuses to implement it.

Contracts for those who cash price VS pool can protect the pool... the CWB's excuse does not hold water.

Padding the Pools with cash pricing basis is the only reason the CWB refuses to offer a fair cash price to ...timm... today.

Deception and denial are the practice at the CWB, which unfortunately spell the ultimate end of the CWB in the longer term.

[timm]

i am contracted under A series,90% epo on last 50%.(2000 mt contract ,first 50% delivered).if i did a basis contract & didnt fulfill what are the penalties.as i understand you just pay the change in basis if it moves lower.also are there epo penalties if not fulfilled.last year i opted into pool instead of filling basis and was charged 58$ mt penalty on a basis contract that cost cwb nothing .now im told by local elevator rules have changed on unfilled basis penalties( ex 14-17 ,3$ penalty).last week i hauled canola into pioneer grain 9.15 net bu. spot no contract no headaches.wheat could be the same and its obvious it would be more efficient.