Fixed Price & Basis Contracts from the CWB

[bbrindle]

CWB will be offering fixed price contracts and basis contracts off the Minnepolis Exchange this spring, for CWRS (except Canada Feed). Check out the details at the CWB site www.cwb.ca -- and let's talk about it!

[craig]

While these contracts are a great new tool for producers ,I remain skeptical until I see the numbers and have more details.We need more information regarding the contingency fund, Time of value of money and other supposed risk factors. In the past there has been a concerted effort to thwart anything that might put the pooling accounts in poor light. So like most government promises in the last year there is a need to see whether this proposal has merit or is just another attempt to act like your doing something when in fact your just trying to pull the wool over farmer's eyes. I keep wanting to give the board credit where credit is due but haven't seen yet an indication that there is any true desire to address concerns from those outside the strong core group of board supporters.

[brian99]

These new contracts arent any better than the pools are now. There is no ability to capture extra profit. We need a CWB sponsored hedge mechanism to lock in when we choose. The CWB is charging extra for its risk and the farmer pays (again) so electing this option actually nets the farmer less. Not my idea of fun.

[bbrindle]

Just to clarify -- they will be offering a 'basis' contract. You are correct that they've well covered any risk to the CWB in setting the basis, and the basis isn't competitive like it would be with canola. However this is a form of a hedging mechanism because the basis is off the Minneapolis futures. If you locked in a basis then you monitor the futures and you do have an opportunity to lock in a profit if one arises, which may be above the pooled returns.

[bbrindle]

Good point Brenda. Also, I'll answer a couple of the other questions that have been posted. First, the basis is a little different than conventional basis which essentially measures the difference between the cash price and the nearby futures price. The CWB basis is the spread between the midpoint of the PRO and the Dec Mpls futures (for contracts signed up in April or May) or the Mar futures (for contracts in June or July). This value represents an adjustment for the different location between the PRO price (St.Lawrence/Vcr) and Minneapolis, and that the PRO reflects a price forecast over the 15 month marketing period and the futures month is at one point in time. This establishes the relationship though. If a farmer chooses the basis contract, though, they have up until the beginning of the relevant futures month to lock in the futures price (ie Nov 30 if you signed up in either April or May, Feb 28 if you signed up in June or July). If the futures rally ahead of the PRO, you can lock it in as Brenda previously said. The time value of money calculation that was asked about is essentially an estimate of the interest cost of the money that will be received earlier. The PRO takes into account the estimated interest earnings that all farmers receive as revenue comes in until it is paid to farmers. This time value of the money adjustment is part of the deduction off the PRO midpoint as farmers in the program will receive all their money sooner than the farmers not in the program. Also, the administrative costs part of the adjustment to the PRO are intended to be cost recovery. The balance is a risk factor that covers unforeseen and unhedgeable risk that exists with the program. Last, the contingency fund has been established and is basically an account to handle any overages or shortages that occur with the program, to preserve that the pool accounts, and therefore non-participating farmers are unaffected by the programs. Tom