CWB 100% Wheat EPO

[TOM4CWB]

Charlie;

At $27/t, for an EPO on the CWRS Pool @ $220/t, this leaves $193/t total payment with only additional payments IF the PRO goes over $220/t.

How could the CWB conceive that $27/t is a fair price to pay for this option?

[charliep]

I will leave your question to comments from others. A note today is the fixed price contract is $194.39. That's a $1.39 premium to the current 100 % EPO after the premium is deducted. The EPO gives you the right to benefit from total payments over $220/tonne.

As a further note, I might add the current PRO (July) is at a $25/tonne premium to the prices indicated by the current market. You are buying a deep in the money put with a 100 % EPO.

What are peoples thoughts about the new pricing tools the CWB is offering?

[TOM4CWB]

Charlie;

I disagree with your assesment on the in the money put.

Here is why.

A March 05 420 put closed today at just under $27/t at $US.551/bu.

March 05 closed @US3.72/bu, or $US.48/bu in the money.

If I (or the CWB for that matter) flat price at the $194.39/t, go long against the March 05 futures,... bingo...

WE GET;

If price stays the same till March;

$194.39/t plus $US.48 ($23.28/t) or $217/t.

If the price drops further, I get more than the $193/t 100%PRO, I get $217/t.

If the price rises, I get all the rise back, (through the long position) including over $US4.20... as high as the market goes up.

WHat EXACTLY did I miss here Charlie?

We all Know the CWB election and Pool initials (the fed setting a conservative initial) have grossly inflated the pool PRO... about $20/t

SO Where are we really at CHARLIE?

I thought the CWB was supposed to maximise our returns through these optional programs.

SICK!

[charliep]

Maybe I am misunderstanding you Tom4cwb but it would seem to me you are suggesting sellling a $420 MGE Put to collect the $27/tonne yourself.

I don't think the CWB has ever committed to maximizing farmer returns through the producer pricing options. Their only commitment is not to impact the overall pool through any aspect of the pricing tools. Their comment (via page 1 of their broshure sent out in the past month on pricing tools) is that things liked the producer pricing options are actually tools that allow farmers to speculate. Just the opposite from my view of the world but reflects their attitude/understanding of risk.

[TOM4CWB]

Charlie;

The CWB would buy the $4.20 March 05 call, if the $27/t did exist, which meant that the $220 PRO is a real number... not an imaginary number picked out of the air by the CWB.

If the PRO is not real... the projected pool return on July 22nd should have been?

If the CWB has presold a significant portion of the 04-05 crop, that makes this 220 PRO a realistic number, then...

If I commit to the 100% EPO, the CWB has the right to sell my grain, covering off the downside risk...

The CWB can risk manage the EPO (Buy the March 05 $4.20 Put), and do it easily for $10/t... NOT $27/t as they have quoted.

This is the point... is it not Charlie?

[melvill]

One thing is forgotten in the discussion of the EPO and the risk management process for it. That is that the EPO process doesn't just include a wheat put option. It also includes a Canuck Buck call option. This morning (9:00 a.m. July 4) the farthest out dollar options were trading was Dec 04. A 75US cent call (one cent out-of-the-money)was bid 1.68US cents.

[charliep]

IMHO, the current fixed price ccontract is a better representation of value than the PRO. That is, a more realistic accessment of the market for 1CWRS 13.5 is nearer to $195/tonne than $220/tonne (both at port). The level of product forward priced should be reflected in their basis. Just a note that basis has strengthened from $10/tonne over to $18/tonne over.

More relevant is CPS red - you have a non board alternative. Non board feed wheat - close to impossible to get a bid but likely in the $115 to $120/tonne area central Alberta. Current CWB PRO - $186/tonne port or $140/tonne local (AB). FPC - $169/tonne port ($124/tonne AB). 100 % EPO - $186/tonne PRO minus $22.25 premium or $163.75/tonne ($119/tonne AB) with the right to enjoy payments above the current PRO. 90 % EPO - $167.40/tonne minus $10/tonne or $157.40/tonne ($112.40/tonne Alberta) with the right to enjoy payments above $167.40/tonne. What should one do?

Comes back to a question of the value of the pool return outlooks in the new world of contracts. I think the CWB should only be providing the forward contracts as a price signal versus any form of crystal ball gazing. The price forecasting function should be handled by someone other than the CWB. It would also be nice to see the premiums for the EPO/basis established in an open market based manner verus an administered program out of Winnipeg.

[TOM4CWB]

Charlie and Lee;

The PRO @ $220/t is $25/t high according to your read of the CWB pre-sold 2004-05 CWRS Pool.

OK, folks, the true PRO is not $220/t but $195/t... but we are dealing with an EPO 100% @ 220/t that will drop back to $195/t according to your read on the CWB sales program for the 04-05 pool.

Now if I took the 100%EPO @ net $193/t ($220 - 27) now the CWB has locked my upside potential, out, till a realistic actual pool payment above $220/t occurs.

Additional Points to back up this problem;
In the Feb 04, 04-05 PRO, the $201 quoted occured when the March 05 Minni. was close to $4.20/bu.

July 2004, 04-05 PRO was $220/t when the Mar. 05 Minni. was at about $3.90/bu

Obviously this does not add up, unless the CWB can claim huge hedge profits to sustain the 04-05 pool $35/t above the Febuary PRO benchmark.

Has this happened?

Charlie says no way, from his remarks.

The CWB EPO says no way, for as I proved, the true cost of a EPO is about $5/t not the $27/t the CWB is charging.

Further the real result and outcome;

Now the CWB locks out the "designated area" 100% EPO holder of the legitimate market move of the pool from the $195/t it is really at now... to the future increased pool value at $220/t.

THE CWB KEEPS this $25/t, instead of the 100% EPO holder of the contract.

Have I missed something?

[charliep]

I can't comment on how the CWB runs their EPO programs because I don't know. That information has to come from them.

Lee and my role is to provide advice on how farmers can use market tools to enhance their profit/reduce their risk exposure. The question comes down to a farmers opinion of the market and the other factors that influence a market plan (i.e. cash flow needs).

As an example, a farmer who needs cashflow off the combine should consider an fixed price contract even today. They can then take some of this money and invest in a call themselves if they are optimistic on markets. They are likely to get better opportunities to participate in rallies at less cost. The risk factor not covered is the loonie versus US buck exchange rate as highlighted by Lee.

[charliep]

Any comments on these programs?

A note that the prices under the FPC have dropped/premiums for the early pricing options increased with a combination of declines in wheat futures prices/a higher valued loonie.