CWB Fixed Price Contracts

[rsomer]

Interesting comments. I was intrigued by the percentage of Peace farmers selling in the bottom third. The best explanation I can give is that normal supply/demand fundamentals would suggest that when the majority of farmers are selling their grain the price should decline so we would not expect to see otherwise. Human nature, competitive forces, financial pressures compel us to at least consider if the commodity market is going to be higher or lower at some future point whenever we make a grain pricing or risk management decision. Higher or lower, a 50/50 choice. If anyone wants to test their commodity marketing skills, take a coin and say heads is higher and tails is lower. Make your best market assessment as to which way the next coin toss is going to go, record your guess and flip the coin. Record the result. Repeat this test a large number of times. If anyone out there can assess the market correctly significantly higher than the mean value of 50% contact me and you can help me with my risk management. We might even do a little speculating together. Now many would say that risk management is not pure chance rather the skill of the player influences the outcome of the game. If a knowledgeable person listens to the right market information they should increase their odds of winning. But it is possible, even probable, that the market information is merely historical data that offers little certainty about the future direction of anything. My opinion. I thought your comments re the WTO and state trading agencies to be very astute. I don’t wish to debate the pros and cons of the two systems either but will make the following observation. At the beginning of this thread Brenda Brindle compared the new pricing contract based on U.S futures to the CWB pool. The U.S. producer is very used to the 'American' system of pricing grain. We would expect them to be very adept at using the various pricing and risk management tools that are available and as such would expect to see their farm profitability increased as a result. Yet I see the U.S. farmer needing to be constantly propped up by massive federal government subsidies. If a Canadian producer intends to price his wheat doing things the American way he is likely to fail unless he can persuade our government to offer us the same level of subsidy support. If anyone is interested I might suggest reading a very interesting book on risk. Against the Gods, The Remarkable Story of Risk, Peter L. Berstein documents man’s efforts to understand risk and probability. Very enlightening.

[rockpile]

rsomer, you are so right, No disrespect Lee, but in your years of teaching, and not farming, you have missed the point of why farmers worry about production decimation. It is because that is final. No hedges, no basis, no options. As for crop insurance - that's an insult. It is completely out of sinc with the times. rsomer has pinned down the essence of risk management - pooling your marketing. Your risk is obviously higher if you do it as an individual than if you are part of a larger group. That is not to downplay the importance of knowing marketing oportunities, but is a much larger issue of strategic industrial planning. Has anyone given thought to the fact that this spring, Western farmers will be investing 3 billion dollars in trying to produce a crop? This investment rivals any recent mega-project undertaken. Isn't it time we realize that our farms are just part of one big factory and that their is zero that the individual can do to influence price? I know, I have 1500 bus. of barley that I grew in 1997 and I 'want' 7 dollars a bus. Any takers?

[charliep]

Just to contribute to the discussion, I have a couple of questions. 1) Should farm managers apply the same principles to debt (operating, equipment and land) as you do to pricing? If you applied the same principles around concerns around yield risk on early pre-harvest pricing decisions, would most farm managers try to operate debt free? Is this realistic? 2) Two neighbors farm across the road from each other. One only uses the cash market when he has crop in the bin. His pricing decisions are based on his market forecasts or failing that, forced sales to meet cash flow commitments. The neighbor plans his sales/pricing in advance based on profit targets/breakeven analysis and cashflow needs during critical times of the year. The way he gets around the yield side is staging sales in as he feels comfortable with yield prospects. Which farmer will have more net income after 10 years? If you were a banker, which one would you loan money to? 3) One of the key issues in the new world the grain idustry is the ability to provide the type and quantity of product when our customer needs it. I am going to make the bold statement that it will be one of the prime requirements in the future to meet customers needs/achieve at least some price premium. Can we as an industry achieve this objective without some type of effective forward contracting programs based as much on logistics/optimizing the grain handling/transportation system as on pricing?

[rsomer]

1) An interesting question. I believe there is a correlation between the amount of debt a farm carries and the amount of yield risk in a given area. Although we do use debt financing on our farm (as I am sure most do), I think we are fairly conservative due to our yield variability. As well we practice some cash flow risk management by remaining diversified with cattle which produce something to sell every year. 2) Now lets see, if we compare the half wit cash farmer who doesn’t use any planning with a financially astute forward thinking neighbour who plans his sales in advance using prepricing tools, which one will have more income after ten years. Duh… Charlie, you are comparing apples and oranges. Lets assume instead that both neighbours were aware of their profit targets/breakeven analysis and cashflow needs during critical times of the year but one farmer sold his grain after it was in the bin while the other chose to preprice a portion of his crop before it was harvested. After 10 years, I would expect both neighbours to be equal financially. At any given point in time a banker might prefer lending to one neighbour over the other as there will be periods when the neighbour who preprices his production will appear to be very wise and there will be other times when the neighbour who sells his grain at some point after it is actually harvested will have the advantage. 3)I agree that the ability to provide the type and quantity of product when needed is key. How this objective will be achieved will be ultimately determined by the marketplace. I would think that pricing will be the tool used by the marketplace to achieve its objectives. Whether or not we will see genuine premiums for forward contracted grain will depend on whether or not the market feels it can access product some other way without offering the premium.