feed wheat v oil price

[charliep]

I should let Tom4cwb speak for himself but what I think he is referring to is the move in basis. The worst basis you could have booked this past year is $10/tonne over (CWRS). The end of October basis was $30/tonne over. Depending on when you signed your basis and/or fixed price contracts, you will have different cash prices. Anyone who signed a basis contract in the summer and only has feed wheat/wants to buy out is facing some severe financial pain.

When a farmer buys out of a non board crop, the basic principle is replacement cost. That is, the farmer forward contracted for a price. When a farmer is not able to supply the contract, the grain company goes to the market and replaces the grain at a price. The gain or pain is the difference between the two. Changes in basis will be a part of this calculation.

When you have a CWB forward contract that is based on a relationship to a pooled price, do the same principles apply? That is (for those of you that don't know), the hedges for a fixed price contract are placed over a whole year, not just the month of the contract. An interesting note is the move from July 31 to October 31 deadline means that the fixed contract basis includes CWB sales that have been put on the books during the fall period(at least to the point the farmer signs a contract). This (I suspect) has been part of the basis improvement.

I am always amazed how people sometimes sign contracts without understanding the process and their commitments/responsibilities. Do farmers understand the process around the CWB producer pricing options? Is there a clear understanding of how the CWB determines basis levels?

[charliep]

How many of you are aware of the ability to lock in a converted futures price on the producer options? If you would have done everything perfectly (you would have been real lucky), you would be selling 1CWRS 13.5 contracts for $5.00 to $5.60/bu (Alta). That uses a converted MGE futures in the $200 to $220/tonne range (available from Feb. to the middle of June), the $30 basis offered in Oct. and a $45/tonne CWB deduction. The average is a buck a bushel higher than the current PRO.

[charliep]

forgot to put in the link to the CWB CWRS FPC graph.

http://www.cwb.ca/en/contracts/ppo_workbook/pdf/2004-05fpcbpccharts.pdf

[TOM4CWB]

RationAL;

Chairman Ritter's comments on PPO hedge returns are telling... just in case you missed them... I will repeat;

"The CWB hedges to manage risks associated with the FPC and BPC. This year, futures markets have generally trended downwards, resulting in hedging gains. Ordinarily, these funds would be placed in the CWB's contingency fund. At its September meeting, however, the CWB's farmer-controlled board of directors voted to return those gains to farmers who are unable to fulfill their contracts. This change will enable farmers to benefit from any futures gains, net of basis change, that they may have achieved on their FPC or BPC."

So the risk management returns are the CWB's not the farmers... WHY?

Chairman Ritter explained why to the Western Producer... as I previously stated here; "In most instances the hedgeing program would not produce gains or produce losses that could only be offset by the physical delivery of the contracted grain, so the board has no intention of making this a policy..."

RationAL: you know as well as I... Adrian Measner's 2003 letter to me that confirms CWB hedge risk management of PPO coontracts.

CWB puts on a hedge when a PPO is done.

CWB adds the hedge to all Pool Account hedges.

CWB does not track PPO hedges and lift them as PPO contracts are delivered against these specific hedges.

The CWB risk manages the pool as a unit... cost of aquiring PPO grain is the Pool Price... not the PPO price paid the farmer.

THis is why Chairman Ritter says... I will quote it again "In most instances the hedgeing program would not produce gains or produce losses that could only be offset by the physical delivery of the contracted grain, so the board has no intention of making this a policy..."

I am sorry it is so complex... maybe if CWB directors were forced to begin to participate in PPO contracts... they might understand how they work a little better?...

[Ration-Al]

Tom,

The reason the gains and losses belong to the CWB is the same reason that gains and losses in non-board crop contracts belong to the contracting party. It is a CONTRACT!! A contract that you enter at your own risk. You agree to take on that risk given the parameters of the contract.

Tom, have you looked at a recent annual report of the CWB. There you will see that the PPO programs are accounted for in separate annual reports just like the pools. A completely parallel accounting system. The PPO hedge activity is NOT added to the Pools. You are the one who lacks understanding. The Directors have been part of the process from start to end. From the outset the Pools were not to be impacted by the pricing options. If the profits from the PPO activity were allowed to be added to the pools then so too would the losses. This is simply not the case. The contingency fund is the risk management tool used to prevent losses (and profits) from going into the pooling system. And yes the contingency fund belongs to the CWB (not the pools since they are paid out to producers each and every year - and that by the way is the reason why the CWB up until now has had no capital base and no net worth)

[charliep]

By way of clarification, some companies will provide the futures gains back to the customer. Everyone has to read their contracts and evaluate whether they fit. The differences vary all the way from act of god clauses to the one sided contracts you talk about to the ability to pocket gains as well as suffer losses. All require some form of documentation (crop insurance claim report, field inspection, etc.).

The issue hear is their is competition in non board contracts - they are not standard. A farmer needs to understand what they has signed and pick the one that has the best fit.

Perhaps what needs to be discussed more is the difference between the impact of futures changes and changes in basis in CWB contracts. Because the current basis reflects the activities of the pooling process up to the point the farmer signs the contract, there is a direct tie between the pooled price and contracted ones. This relationship shows up in the basis. I would also suspect there is no separation of physical grain sales relating to the CWB pool and the contracts. Again, both are tied together in the CWB overall sales program.

My guess is where the CWB is headed is daily cash pricing. Physical sales of grain that relate to this activity will be outside the pooling process.

[Ration-Al]

Charlie,

I will admit that there is a lack of competition in the CWB contracts, this being the nature of the single desk. I am open to suggestions as to how this could be remedied without dismantling the single desk. I would be reluctant to add a third party intervenor as that would simply add costs.

I cannot see any reason to separate physical sales of contracted grain from pooled grain. Once the grain is contracted the CWB takes ownership of that grain and indemnifies the pool with its hedging mechanism. Why would it matter to the producer how the grain is sold once it has been contracted. If I sell a non-board grain to Cargill I have no further interest in what they do with it.

I do hope that the fixed price option can be provided to producers on a daily basis throughout the year. The reason this is not currently the case is the option of picking between the pool and the fixed price option. Once there is an obvious gain by making one choice or the other by viewing historical data those people who have committed earlier are disadvantaged. There is a way to avoid this. Let us simply have a different PRO for each contract. Right now we are allowing the option of taking a fixed price contract right to the end of the "A" series sign-up. If the "B" series contract had a new PRO (separate pool) then we could extend the fixed price option to the end of the "B" series sign-up just as it is now available under the "A" contract. To perfect this system I would suggest that there be four contracting periods like we used to have, each being for 3 months and each having separate pools and unique PROs. The CWB would still be free to market the grain over the course of the entire 18 month pooling period. To further clarify, the end of the contract sign-up would not signify the close of the pool. Sales and physical movements would continue throughout the pool year according to an overall sales program and customer committments.

This process would provide more accurate signals to producers and the CWB would be more able to manage the downside risk of the market for each pool. Ultimately there would be more confidence in the PRO being maintained. More producers would be encouraged to sign up for earlier contracts and the CWB would have better inventory information. The current system rewards those who sign up for the C contract with the same pooled price as those who contracted under the A while allowing them to specualte over the majority of the year. The only downside of waiting is the threat of contract acceptance. Under the new proposal contract acceptance could be higher as there would be no need to indemnify the earlier pool participants.

[ianben]

Ration-al you said
Why would it matter to the producer how the grain is sold once it has been contracted. If I sell a non-board grain to Cargill I have no further interest in what they do with it.

This is the problem.

CWB is selling unpriced grain when it uses pools and pooling the PRO just increases this. The producer must be interested in what price he will get

Cargill own their grain so the producer has no interest quite rigthly.

Do the CWB know the value or care what price grain makes.
Feed wheat has an energy value of $3.50/bu yet CWB says unharvested grain is worthless?
How is this single desk providing a premium?

[Ration-Al]

ianben,

Your own grain is unpriced until you sell it. This applies to anyone who has produced grain whether they are in UK, US or Canada. It becomes priced grain when you choose a selling price. How many transactions are based on the energy value? No doubt many transactions take place with no regard for the energy value. Sellers and buyers have other concerns about available storage space, cash flow, delivery opportunity etc.

The CWB is selling on behalf of the farmer and tries to use the same criteria that the farmers would use. The CWB advertises to the farmer the anticipated returns through the PRO. If the farmer chooses to deliver to the CWB based on this criteria or if he chooses a selling option that gives him greater certainty such as a fixed price option or an early payment option then the CWB takes that as their directive to market the grain on behalf of the producer. The CWB then markets the grain as would the individual producer and attempts to maximize the return for that particular class and grade of grain into the competitive world market.

The CWB's marketing activity is benchmarked to assess this performance and the results of that benchmarking have been identified. The Agricultural Commissioner for the EU, Franz Fischler has stated that the CWB earns a premium of roughly $10.00 per tonne. Under WTO rules the EU considers this premium although it is earned from the market place to be a subsidy. If a private firm earned this premium it would not be a subsidy but because the CWB exists by virtue of a legislative act the WTO rules say that this premium which is earned from the market place is a subsidy. Go figure!

[ianben]

Ration-al
The CWB then markets the grain as would the individual producer and attempts to maximize the return for that particular class and grade of grain into the competitive world market.

Just like a massive farmer then gaining a small premium while depressing the market for all with sales based on things we should be able to control but fail to do.

Does CWB and Canada not have an obligation to at least admit grain has an energy value and try to ensure it is not given away at a huge discount.
Removing this low priced low quality grain from the food chain would earn us all a premium.

Does the CWB do any inovative marketing?

The Cargils and Dows of this world do try even if like the neorexa canola sometimes better than others.
Mostly I notice this is with oilseeds we have a new crop "crambe" which produces a slip agent for plastics industry. I cannot believe there are not opertunities for grains to be used in industry with the right partners.

As a small farmer I cannot even contenplate this but the massive single desk CWB farmer must be able too

Why is Canada not at the cutting edge with this marketing advantage?