CWB Basis Payment Contract (BPC) Expanded to Include Designated Barley

[charliep]

Just a note to highlight the new contracing alternative for designated barley. Release in the CWB Bulletin below.

The CWB has expanded the Basis Payment Contract (BPC) to include designated barley for the first time. A pilot program of 50,000 tonnes will be offered for the 2005-06 crop year, for farmers who deliver directly to a malt processing facility. Pricing will be based on reference grade of Standard Select Two-Row and Six-Row barley, in-store Vancouver or St. Lawrence. Prices will be based on the Winnipeg Western Barley futures market. The program offers increased pricing flexibility by providing the ability to lock in a premium for malt barley over feed barley futures and take advantage of market rallies that may occur within the crop year.

Program will start May 16 and continue signup until October 31. Obviously, you can carry your basis forward from Nov. to July to price. My understanding is will be available only when supported by a production type contract/relationship with a maltster. Issues to be followed include the actual basis with western barley futures and how quality disasters/non selection is handled. Stay tuned.

[JD4ME]

Thoughts on the initial basis Charlie or Lee? If I am not wrong as of today with approx. 38 dollars in deductions it would work back to me at 2.81 at the bin unless the maltster is paying the trucking, and its not looking that dry yet then I'll guess at 10 trucking and that moves us too 2.60 at the bin. Am I right with my math and understanding of the program?

[JD4ME]

2 things I neglected to add in my figures last night were 3.00 Tonne for the VIP program and the question of what is shipment to the domestic maltster, if you have a contract through a line company with a domestic malster does this qualify and also CMC Calgary have bought elevators in Alberta that they like to run grain through to get elevation. These took you out of the VIP premium program do they take you out of the basis program as well?? I suspect in both these instances they would.

[melvill]

Sorry I can't answer your questions. One of my tasks today is to read the details and see what's in the fine print.

[charliep]

I will let Lee answer but can comment on a couple of things I have seen in an Informa Economics Canada article.

Std Select 2 Row Malt barley basis levels (port) over western barley futures (Lethbridge) have varied from $40 per tonne over to $65 per tonne over. The relationship is very volatile with wild swings during the year a normal event. There would also does not appear to be any seasonal patterns.

I would note this program only applies to producer pricing alternatives and not how malt is priced to domestic maltsters/brewers. For the CWB to truly manage their risk, they would have to lock in the basis on the domestic maltster side as well. The CWB is not likely to go there as this would end up resulting in a separate malt barley pool for the domestic industry or cash pricing within the current system (no relationship to the pooled price).

[melvill]

A few more tidbits from a detailed analysis:
-best time to use the select basis contract is likely when the basis offered is $60/t (over) or better for 2-row and $45/t (over) ot better for 6-row.
-in six years between '99 & '04 seasons, a strong basis and high futures leading to total payouts greater than expected pool returns could have in 2001 and 2003 - providing producer futures lock-in timing was bang on.

There is significant production quality risk in this program, especially for farmers who sign up before harvest, since the program only applies to deliveries to maltsters, not elevators, which may accept a slightly lower quality. At sign up, a producer must designate which malster location he/she intends to deliver to. That adds another bit of quality risk.

Incidently, one malster, who claims to be the fussiest in terms of barley quality, says that about half of their famer-direct deliveries come from producers whose barley is selected four years out of five. Those producers may find this a useful program.