CWB Changes to Early Pricing Options

[charliep]

Just a note to highlight the changes to the CWB Early Pricing Option Announced today. You can go to 100 % of the PRO on both feed barley and wheat excluding durum.

http://www.cwb.ca/en/contracts/early_payment/index.jsp

I will find the relationship between the FPC prices and the EPO minus discount pretty interesting over the next year.

CWRS 13.5 - PRO - $220/tonne. Cost of EPO - ?. You have the opportunity to participate in payments above $220/tonne (port). Fixed price contract - $203.33/tonne. This is your price (no potential higher payment). CWB basis on CWRS - $17.04/tonne over Dec. MGE converted Cdn. dollars.

CPSR - PRO - $184/tonne. Cost of EPO - ?. You have the opportunity to participate in payments above $184/tonne (port). Fixed price contract - $173.75/tonne. This is your price (no potential higher payment). CWB basis on CWRS - $4.94/tonne under Dec. KCBT converted Cdn. dollars.

Feed barley - Who cares. Domestic cash price is still better than anything the CWB currently offers. If you can make money growing $1.65/bu barley, then sign.

An interesting question is how a farm manager will make the pricing decision this fall. The relationship between the early pricing option (PRO minus discount similar to a put/minimum price contract) versus fixed price contract (locked in price) will have to be watched carefully.

[charliep]

Just to highlight the likely cost of a 100 % EPO premium, I put the following foward.

PRO 1CWRS 13.5 $220/tonne.

Subtracting the current basis ($17.04) and converting to US dollars/bu results in a US price of US $4.14/bu.

Todays December futures close -$3.80/bushel. Signing an early pricing option (if they were available today) would be the equivalent of buying a December put 34 cents into the money. This is not 100 % true as the CWB has to spread their risk over the whole pooling year.

Cost of an MGE 410 put today - 37 cents/bu. Cost of a Dec. 420 - 45 cents/bu. Average cost - 41 cents/bu or Cdn $20/tonne. This provides a guaranteed payment of $200/tonne (port) for 1CWRS 13.5 wheat (100 % PRO minus premium).

Cost of a 90 % EPO. Wouldn't go through the numbers but is the equivalent of buying a Dec. MGE 370. Cost 10 cent/bu or Cdn $5/tonne. This provides a guaranteed price of $193/tonne (port) for 1CWRS 13.5 wheat (90 % PRO minus premium). Able to enjoy any increased payments over $198/tonne (port).

I apologize for doing this but part of the fun of being an economist is trying to figure out how things work. Something like having a new piece of equipment. The same thinking process is involved in analyzing both.

[TOM4CWB]

CHarlie;

It is really too bad the EPO options were not avaliable earlier in the spring... as we highlighted when the PPO contracts were first introduced for 2004-05.

This EPO tool before seeding would add greatly to a risk manager's tool box... much more than offering it now after the horse has escaped from the barn. Typically seasonal lows in the wheat market occur in July/Aug... which is why the pool EPO should be much above the Fixed Price Contracts in July/Aug.

Still moving to a 100% EPO is a valuable tool... amazing what election year/marketing choice pressures can create down in Winnipeg!

Keep up the good work Alberta AG/Gov. marketing choice is winning us big benefits!

[charliep]

Back to scratching my head as to the value of PRO and the counterdiction of having the same agency provide price signals and hedgeable forward payments. Wouldn't it make more sense to offer minimum pricing alternatives based on the producer pricing option values rather than tieing them to the PRO?

[Armin]

I don't see the problem of tieing the 100% of the pro to the announced pro. If you use this option the lowest you will get for your is the pro you price on minus the admin. charge. If the actual price goes higher than the pro you priced on you are ahead the game if the admin. charge isn't out of hand. If the charge is to high you go to thr other options or stay in the pool. I don't see what the promblem is. It's no different than working with any commodity when you price. Let's face the board has come a long way when it comes to pricing options. I don't believe for one minute that we can do better on our own. Take a look what happened to beef. Take a look what might happen to our hogs if the U.S. decides to close the boarder or put a tarrif on them. I live close to North Dakota and have talked to farmers there who would love to have the system we do,in fact some even formed a committee to see if they could join us up here when it came to marketing thier wheat. Don't believe for one minute that the border will magically open for our hard wheat or duram if the wheat board would magically disappear over night. Even their own universities are the bse situation is political not based on sience. For some reason there is the thinking out there that we can do on our own but just looki at the world today,we have bigger trade blocks. Do you think that the European farmer would have the clout if wasn't for the E.U.? It would be interesting to do a study to see if the basis on canola would as wide as is now compared to what it was under the board. Let's remember that a house divided doesn't last long. I'm not saying that the wheat board is perfect. It's run by people and the last time i checked nobody is. I think we need to try and keep the politics out of the board and let it get on with doing what it was ment to do. That is to sell our wheat for the best price return to us. Remember that our wouldn't even make a whimper about it if it wasn't doing exactly that. ARMIN

[boone]

Well Armin: nice speech I think I've even given it myself at sometime, but talk about a house divided. The facts are fasciculated and have yet to play themselves out totally but I'm wondering if the heavy promotion of the fixed price option this late winter and early spring wasn't the board trying to cover up underselling the value of the high quality wheat once again? It appears to me we have a quasi dual market formed here, what the hell is left, Cargill bidding exposed once and unexposed at the same time, well relax that is coming shortly. I repeat for any newbies here, if the board does not come within a couple dozen cents of the highest offered price (FPO) for top quality wheat, I will become Tom4CWB's campaign manager to run against our incumbent and illustrious CWB leader. I might even take out an account with one of those nefarious grain/trading/brokers.

[TOM4CWB]

Armin;

The PPO's are ficticious pricing options... as real pricing by the CWB of our grains are all still done in the pool, by the pool, for the pool.

This is why cost of sales for PPO contracts is the pool price for the year, determined at the time of final price discovery for the whole pool year.

Risk management of the PPO's and Pool are melded together... and all indications I have been given prove they are not seperable, the acid test to discovering if a fair basis is being charged for the PPO contract holder.

From everything I have seen, the basis is a handy tax created to manipulate and add funds to the CWB capital fund... the contingency fund.

I see no cost of sales for PPO contracts... using the Pool as a cost of sales while melding hedge risk management is with the pool... creates an untracable trail for the true determination of what the actual basis is.

This in my estimation is the point of PPO/Pool based contracts, to hide CWB performance.

This is unfortunate for those who truly need to know the true value of the CWB single desk system.

Every farmer in western Canada needs to know how well the CWB performs, to judge if we are being given value for the costs of freedom the CWB extracts, to justify/maintain single desk powers in marketing our grain.

[Incognito]

welcome back Boone. I was getting tired of talking to myself or my 16 month son about grain policy.

[boone]

Incognito: If he's been following the last 16 months he is at least as worthy as the rest of us to scratch his head. I was wondering if the fixed price option had taken the peak out of the pool price by quenching the fire, what's your take, anyone?

[ALLFARMER]

Glad I did some locking in this spring 1CWRS Wheat $4.64 Canola $8.60 for Dec. New crop canola cash price I heard today likely will be under $7 I think the good looking crops (south of Township 95) are starting to hammer prices and will continue to do so all fall.

[ALLFARMER]

I predict Canola $6.80 off the combine.

Armin don't believe everything you read in Grain Matters, the CWB is not nearly as great as they repeadly profess.

Why does the CWB need to hiring 3 different photography companies to produce their annual calendar? Maybe they did it for free just to get their own picture printed on the back of the calendar...sure! More of farmers money well spent! Anyone who cares who these guys are let me know, I can't figure it out?

[Incognito]

Hey Boone: I'll give u a better answer on the weekend. I'm off to the lake. Last weekend of summer. Some guys combining peas this aft that were seeded on Apr. 23 and 26th. Bushels per acre so far are scary for prices.