Deciding on the CWB

[chaffmeister]

lakenheath
Thanks for the answer. According to the CWB's website, the PRO for #1CWRS 13.5 in Feb, Mar and Apr of 2005 (for 05/06) was 192, 195, 194 respectively (compared to the current 201.
What am I missing?

[lakenheath]

Chaff,

Sorry, you are correct. I clicked on the wrong link at CWB website. Anyways, the PRO's are very poor and never improved from last spring. Multiply that with increased fertilizer prices.

[lakenheath]

Chaf, the differnece is when you pencil it in last spring you bank on a #1 grade. Now with all the #3 out there it doesn't pencil out. I know the grades aren't the CWB fault but I'm curious why they keep dropping with the current rally in the States?

[chaffmeister]

Thanks guys – I though I was losing it there for a minute!

From my experience, when the PROs go down while the market goes up, it usually means either (1) the CWB has sold a great deal already at the lower prices or (2) the Canadian dollar has moved against you. Either way, even though the world market rallies, the CWB PROs can’t keep pace.

Here’s the math as I see it on the forex part:

Back in Feb 05, nearby MGEX futures were about $3.45 and the USD was 1.2400 (or thereabouts). This works to about C$157 per tonne; PRO of the day (C$192) equates to about C$35 over MGEX futures (very rough numbers because I’m using monthly prices).

Now it’s Jan 06 and nearby MGEX futures are about $4.00 and the USD is 1.1460. This works to about C$169 – about C$12.00 per tonne higher than in Feb. The PRO is about C$9.00 higher than in Feb in absolute terms but about $32 over MGEX – a drop of C$3.00 in relative terms (from the C$35 over back in Feb).

If we take today’s MGEX futures price and convert to it Cdn dollars per tonne using the same FX rate as in Feb, we get about C$182.00 per tonne – about C$25 higher than Feb’s MGEX price. If there was no change in the CWB’s price in relation to MGEX futures, and the FX rate did not change, the PRO would be C$217.00.

Of course these are real rough numbers – and the PRO is based on more than spot prices and spot FX rates, but seems forex is a big part of the problem.

[Incognito]

Chaff:
Thanks for the breakdown.

When the dollar was 1.24 and 28/28 analysts polled by Bloomberg expect a 1.14 to 1.10 in the following 12 months, would it not be prudent to hedge some of the currency?

The argument that the CWB has used from the time the dollar was 1.60 was that pre-hedging was speculating. In your opinion, when is it fiscally responsible to book the dollar?

[Vader]

Market development, logistics, brand development, and customer relationships are a few of the things that perhaps are areas where the CWB is uniquely qualified to engage.

The CWB has no "special" view on the future of world currency. Since this type of activity can be called speculative and because each individual has different risk tolerances why should the CWB make these decisions for everybody rather than letting them do it for themselves?

Anyone can hedge the dollar given their own personal view and risk tolerance. Go for it!!

[Incognito]

Has that view been communicated to farmers?

That the PRO and the volatility of currency is their responsibility.

It is my understanding that the CWB has a Risk Management team.

If currency has been the biggest risk to grain prices- how are they managing it?

[TOM4CWB]

Vader;

The CWB attitude quoted is exactly what I would expect from those who follow, instead of Lead.

The PRO is sinking.

Growers have placed their trust in your marketing ability and knowledge of the world markets...

The CWB had a obligation to risk manage the pool account; as the CWB alone know what is sold, what is priced on a basis, what is unpriced, and exposures associated with these positions.


My Canola marketer hedges the CDN$ years ahead on my behalf... on a production contract; without a specific volume, only an acreage contracted.

Why should I expect less from the CWB?

[lakenheath]

That is crap Vader. Lets assume a farmer decideds to hedge against currency risk. How can he be assured that if the Cdn dollar devalues that the price offered by the CWB will in fact increase in value?

[chaffmeister]

Quite frankly I’m stunned by your posting Vader. Not that long ago a senior financial department staff member at the CWB told me that the CWB has a “very sophisticated” forex modeling and hedging protocol. I took this to mean the CWB does indeed have a “special view on the future of world currency”. So either he’s wrong or you’re wrong – bottom line is I feel mislead. Which is it? Truthfully.

You make a couple of other important points:

(1) “…this type of activity can be called speculative”. Let’s assume you’re right (although I disagree). Then selling wheat futures in advance of selling cash wheat is also speculative (which I also disagree). But I am told (again by senior CWB staff) that the CWB indeed does sell futures ahead of selling cash grain in order to lock in attractive flat price levels. So, by your definition, the CWB speculates with wheat but not the dollar. Why?

(2) “…because each individual has different risk tolerances why should the CWB make these decisions for everybody rather than letting them do it for themselves”. Well put. If only you could see that this applies to wheat and barley as much as it does to forex.

Oh yeah, one more thing, about your comment saying “Market development, logistics, brand development, and customer relationships are a few of the things that perhaps are areas where the CWB is uniquely qualified to engage”. Please tell me you’re not serious…

[Vader]

The CWB's hedging program is linked to actual sales and it has a component that is "smoothed". The CWB does not speculate on the dollar.

Individuals are afforded the opportunity to exercise their own judgement based on their desire and capacity for risk tolerance through the various pricing options.

[Incognito]

The BOD are right about one thing then: The CWB will not make it in a dual market - not with that attitude.

I ask again...When does the viability and sustainablility of the farmers come into question?

The BOD knows the uptake on the FPC, BPC and EPO contracts and would know that 95% of farmers would not hedge the CAD/USD because they don't understand it nor the implications. That is why they have entrusted the CWB to RISK MANAGE their wheat and barley. They don't expect it from pulses or oilseeds. Farmers do expect that the CWB is looking after their best interests.

I've gone from get rid of the CWB in the 90's; to we need the CWB to defend farmers and because of the demographics of the farm in the first part of this century to where I am today and that is:

If the CWB doesn't care about the health of the farmer - what the hell was I thinking?

The currency issue has been a thorn in my heel for a long long time. Being omnipotent and not ensuring the well being of the shareholders (the farmers) makes the BOD look really selfish and arrogant right now.

Chaffmeister is right. Speculating on wheat sales is ok. Hedging the dollar is not. In an earlier post, it was mentioned that staff would end up leaving in a dual market, compromising the CWB. I do believe the CWB has an excellent staff and maybe the right answer in a dual market is for the BOD to leave - With no interference, I'm sure they would figure it out.

[chaffmeister]

If the CWB’s forex hedging program is linked to actual sales, it sure as hell aint “a very sophisticated modeling and hedging protocol” as I was told (by the guy in charge of it). In fact it was suggested that it’s much more than plain vanilla hedging forex on sales – which totally contradicts what you’re saying, Vader. Also – I don’t have a clue what you mean by a component that is “smoothed”.

Oh well, I guess like most other things about the CWB, we’ll just never know.

I’m struck by the irony of the CWB offering farmers “the opportunity to exercise their own judgement based on their desire and capacity for risk tolerance through the various pricing options” yet also maintaining that this must be through the CWB pooling system (or at least it must not impact the sanctity of the pool). CWB pricing options are designed more to enshrine the pool (which they do) than to give farmers any highly effective risk management tools (which they don't).

The pool is sacred; individual farmers’ needs are not.

It’s a one-way street with the CWB. You can play with these pricing options as long as you don’t financially injure those in the pool. And yet those playing in the pool wreak financial havoc outside of the pool. I’m amazed that those that support the CWB do so enthusiastically even at a real cost to those around them that don’t – including those that grow non-CWB grains. And the foundation of the pool is equity; you’re kidding, right?

If you still believe the CWB is your “best defence against the multi-nationals”, is the only thing keeping you competitive in the global market, provides real market power, will provide leadership in canola and biodiesel and all that other tripe I’ve read here and heard elsewhere, just say so and I’ll be happy to tell you more tales of inequity, marketing ineptitude, redundancy, costly arrogance, waste, poor logistics management, lost opportunities (of just about every description), collateral damage, sex, lies and videotape. There is absolutely NO DOUBT in my mind that the CWB is costing you big time – and I don’t mean just in lower prices. Let them brag about getting premiums – there is no way in the world that some puny $10-20 premium can come anywhere close to what the CWB system is costing you right now.

I'll admit that the CWB may be able to give farmers some countervailing power against the "nasty multinationals" and the railroads (even though I'm not convinced you need it), but be aware that this big brother comes with a huge price tag.

[Vader]

It is late and I am going to make this short.

I do not favor pooling and I am open to any suggestion as to how to improve the CWB and make more money for farmers. In fact if the CWB comes with a HUGE price tag that outweighs any value proposition then I might even be convinced to wind it down.

Incognito, I think that the viability of the farmer must come first and foremost. I do not like that the CWB has not enshrined profitability in its vision and mission. Maximizing farmers return is a poor second to profitability.

What would the two of you suggest? Put it in simple point form (if that is possible since there is no such thing as a simple answer to a complex problem). List the objectives 1-5 max, three would be better.

[Incognito]

Not ignoring this today but will give it the time it deserves tonight.