US Dollar up to 81.85 overnight

[Incognito]

The U.S. dollar tumbled to fresh multi-month lows on Monday in Asian markets.

Led by the yen which punctured the 107.00 level, the US dollar was under pressure across the board.


The Canadian dollar forged ahead to 1.2222. (81.85 cents versus Friday's close of 81.06)

It closed July 31/04 at 75.08 and Dec. 31/03 at 76.22.

On May 14, there was an opportunity to hedge a 71.40 (1.4005). Do you think the CWB protected the PRO's this year?

[freenorth]

They don't have a history of actively hedging currency in the past. One
would hope they've learned from these expensive lessons but I wouldnt
bet on it.

[TOM4CWB]

Incognito;

Frustration is key at the CWB sales dept;

CWB Directors do NOT understand risk management... nor do the majority of poolers intend to learn.

The CWB pool is the risk management tool for the CWB... on the production side. CWB Sales uses the risk management tools... and producer hedges are folded into the CWB pool of all hedges. Chairman Ritter backs this up in the recent article in the Western Producer talking about refunding hedge profits to those who have unharvestable wheat or feed wheat.

Ritter states that the profit on hedges are being given back because of the CWB Directors "compassion" given the August 20th frost...(not because they exist).

Chairman Ritter goes on to say;

"In most instances the hedging 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, Ritter said". (Western Producer page 16, Oct 21/04)

This is double speak that the pools are paying the contract hedges... and the CWB in fact uses the pool account as their "risk management" hedge tool on the producer side.

Pres. Measner sent me a letter in 2003 stating this as well (that PPO hedges are added to all hedges, and NOT lifted systematically as PPO grain is delivered against the specific hedge...) this is simple confirmation that the CWB has this simple "risk management" strategy... farmers take the risk through the pool, including the PPO pricing programs.

I for one do not appreciate neither the simplicity nor the cost to my farm for this awful CWB mangement practice.

Payment of PPO hedges was not planned in advance... therefore as an "afterthought" it is hard to believe that the revenue for these "compassionate" PPO hedge payouts are coming anywhere but from the pooling accounts!

[crusher]

From past actions and comments, astute farmers will realize the CWB does not hedge the Canadian dollar and should be doing it on their own.

[melvill]

This will throw a little grease on the currency hedging fire.

A relative of mine is the Chief Financial Officer at a mid-size oil company in Calgary. They do not and have not hedged oil prices, gas prices or the Canadian dollar. I don't know why and when I asked him why, he said that was a policy decision made by the Board of Directors. Apparently, prehedging future sales is not something that's common with oil companies. They do hedge the Canuck Buck after sales have been made but they don't commonly do it in anticipation of future sales. That may change after the recent rise in the Cdn$.

I noticed in one last week's Globe & Mails or Calgary Herald that one of the major oil companies had admitted that their last quarter profits were down because they had hedged their oil production. As a result they were ending their hedging activities. Of course, public companies live and die based on quarterly profits so their situation may be somewhat different.

Incidently, rumor is that one of the CWB's non-farmer Directors advised the Board not to prehedge currency on anticipated sales. They were advised to hedge currency as soon as sales were made and, in fact, my understanding is that that was done.

Thoughts?

[Incognito]

Thats a recipe for disaster.

If you bought wheat from a farmer in August based on a 75 cent dollar (1.33) and sold it yesterday based on an 82 cent dollar (1.219) and a CIF price of say USD$200.00 ex Vancouver,
you've taken a CAD$22.20/MT bath in 3 months. It's not lost profit because it goes back to the pool and the fall is divided equally but it is lost opportunity.

Explain to me why the Australian Wheat Board has their currency/hedging program down pat that they praise it rather than blame it?

[chaffmeister]

Incognito:

The issue you raise is not really about hedging - currencies or wheat - but about timing your sales when the market is showing you good prices.

Your example talks about buying "wheat from a farmer in August based on a 75 cent dollar" and then selling it with an 82 cent dollar, thus creating a loss. This is the same loss as if the price of wheat was $220 in August and it dropped to $200 before the CWB sold it. In both cases, as you say, it's really just lost opportunity.

It's easy to criticize the CWB for not picking the top of the market - of either the forex or the wheat market. but the reality is that nobody can. If the CWB hedged the forex and then it worked against them, they would have been soundly criticized.

What we should expect from the CWB is a pooled price that is better than the average market price for the crop year (perhaps even much better - apparnetly they get premiums!). But studies have shown they don't - in fact, these same studies have shown that the CWB actually provides pooled returns that are lower than the average, sometimes much lower. See Sparks Barley Study at http://www.choicematters.gov.ab.ca/files/pdf/Barley_Study_April_04.pdf

As for hedging - wheat, barley, currencies, whatever - the ones at risk are the only ones that should be making those decisions. No one knows what price is right for you and your farm - and that includes forex.

Which brings up a question: every futures broker or market advisor active in Canada has to be licenced with regulatory bodies such as the IDA and/or provincial securities commissions. Is the CWB properly licenced to hedge on your behalf?

[TOM4CWB]

Chaffmeister:

I asked the securities commissions the same questions. They ended up saying in essence the CWB was exempt the rules of the normal securities marketplace.

Totally agree with you on sales and hedging... timing is key... and only the farmer knows the right time for his own farm. The CWB needs to respect this. Stopping CWB cash sales is a bad idea, and only reinforces pool dependancy and lack of vision.

[Incognito]

Chaff:


13 out of 14 foreign currency traders polled by Reuters in May said that the dollar is going to 80 cents by year-end.

What value is the PRO if no one is protecting those values released?

Do the directors have better intel?

[chaffmeister]

Incognito:

Not that I'm here to defend the CWB, but there is nothing to indicate that the CWB DIDN'T hedge its currency exposure.

When the CWB explained why it had an $85M deficit (about $8.00 per tonne), it indicated that the strong Cdn dollar contributed $12.00 per tonne to the deficit. Most people read that as saying that the CWB didn't hedge the dollar - and only if they had, there would have been no deficit.

They were wrong - what it meant was that, due to a number of factors, wheat prices ended up much lower over the year than the CWB anticipated - and $12.00 of that price decline in wheat prices was calculated to be due to the stronger Cdn dollar.

By my rough calculations, based on the total forex exposure that the CWB wore that year (again, based on my rough calcs) would have cost them somewhere between $25 and $30 per tonne. Remember - 'twas a big move that year. If I'm right, it seems to me that the CWB did hedge a portion of their risk (in fact, I know they did.) Should they have hedged everything? Prudence would say no - they same way farmers shouldn't hedge 100% of their crop in the ground. Could they have done better? Perhaps. Could have done worse tho too. this all supports my earlier stated contention - the CWB has no business hedging anything for anyone. THE ONE WEARING THE RISK IS THE ONLY ONE THAT SHOULD BE PULLING THE TRIGGER ON ANY HEDGE POSITION OR SALE.

A closing note: It's unfortunate that Adrien Measner allowed the news release to go out the way it did - the treasury guys were not happy about it because it made them look stupid (which they aren't).

[Incognito]

AWB distributes $311 million from 2002 Pool ( 09/10/2003)

“While international wheat demand remains very sluggish and the strengthening Australian dollar continues to put pressure on EPRs, AWB’s hedging program is well advanced and is reducing the impact on pool value,” said Ms Scales.

AWB increased new season Pool estimates ( 04/08/2003)
"AWB is managing the 2003 Pool physical sales and hedge program on behalf of growers to take advantage of upside movements in price and has been able to reflect this through an increase in new season EPRs.

Increase for 2003 Pool estimates ( 18/11/2003)

“The further strengthening of the Australian dollar has offset some of the gain in wheat prices in Australian dollar terms, although our strong hedging position is insulating the impact of that movement on the National Pool,” Ms Scales said.


How many people do the CWB have in the Risk Management Department?

[chaffmeister]

Incognito:

Gotta love it. AWB proudly reports how their "hedging program is well advanced and is reducing the impact on pool value” and how their "strong hedging position is insulating the impact of that movement on the National Pool”. Meanwhile, the CWB is doing pretty much the same thing (in forex) but chooses to blame the deficit on strength in the dollar. I guess if the CWB had said they had a “strong hedge position” on the dollar it would have made their grain merchandising results look even worse.

Interesting that the AWB “is managing the 2003 Pool physical sales and hedge program on behalf of growers to take advantage of upside movements in price and has been able to reflect this through an increase in new season EPRs”. Let’s see… upside movements in price AND increases in EPRs…what kind of hedge can do that? In very simplistic terms, it may be that they hadn’t sold or hedged much at all and the market was simply going their way.

I guess I’m a cynic - you and I both know from personal experience you can’t always believe what you read in the papers. All your clippings are from a year ago. Any idea what they reporting this year?

Don't know how many people the CWB have in the Risk Management Department. Why do you ask?

[TOM4CWB]

Incognito/Chaffmeister

Heard one anicdotal reference to this issue this spring.

In a Board mtg, the CEO said in frustration, "Just tell us what you want us to do!"

This is a matter of planning and process... not guessing and picking a high or low in the market.

Pool processes of leaving risk with pool holders is a principal the majority of CWB Directors have practiced in practical terms.

Lefty Directors have led the CWB on this policy.

Sorry guys, but what we have is our own fault... we fail to elect a majority of directors who respect individual property rights... and the result is exactly what we asked for!

Visit www.tom4cwb.com and tell me what you think!

[charliep]

Just a note we have what appears to be a Republican win and a weaker what appears to be a slightly weaker dollar (Canadian loonie up almost 90 points and Euro up 100 points. What are you reading about the impact of the election on currency in your newsletters?