??? for charliep

[farmboy044]

Hi Charlie, my question is related to the basis contract of the CWB, (CPS for 06-07). THe basis is unusually high right now, but you reported in an earlier thread that the basis now reflects any sales made by the CWB in relation to the futures price and the PRO. I thought the CWB would offset any fixed price contracts or futures portions of the basis contracts with KC wheat, to hedge their side. Now, with the way the basis is, if they never make any sales at this price, it could just stay wide, or the pro would have to be adjusted higher before the basis would narrow.
It seems to me the way the CWB is doing this now, anyone taking a fixed price contract or basis contract, is just being averaged closer to the PRO.
This to me doesn't seem fair, they had a good thing going on, (realized it) and now want to capture some of the premium from those outside the pool.
Could you give me your version, please.
Thank you in advance
regards

[charliep]

The fixed price has always been related to the PRO.

Actually not that much a change in how things are fixed price contracts are done but there will be a change in reporting if I understand correctly.

When a farmer signs a fixed price contract, the CWB manages their risk in the futures market across the whole pooling year. When you sign a December FPC (whatever the type of wheat), they would average their futures hedge positions across Dec. 2006, Mar. 2007, May 2007, July 2007 and likely Sept. 2007. They gradually pull these hedges off through the year as sales are made and money deposited in the pool account. The sales made prior to your signing a FPC (or pricing out a basis contract) are included in the calculations and will be shown this year as a separate adjustment (if I understand correctly). That way, the actual basis they show will be a cleaner number if you like.

The example last year was hard red spring wheat. The $38 over in October is higher than had been seen before. Some of this reflected the wide protein premiums. Some also reflected higher priced sales that were made early in the crop year.

Both the operations of the pooling system and the fixed price contracts are very complicated to say the least. They also tend to hide the true value of your crops through all the averaging and spread processes that are in place. Any move to cash pricing (either inside or outside the CWB) which reflects a customer value is a positive thing IMHO.

[charliep]

The contract that comes closed to what you are asking for is the daily price contract. The problem with the DPC is they are not available right now. You sign the contract prior to August 1 (likely starting April/May) but not do any pricing until new crop. Even then, you cannot forward contract (only price on delivery).

In all the CWB contracts, the farmer holds all the grade and protein risk between the time they sign the contract and the crop is delivered/priced.

[craig]

Charlie
Care to take a stab at this question. If we had an option of doing deferred delivery contracts through grain companies for cps and HRS wheat what estimate of possible prices would we be looking at.If we could add $.50 a bushel to current fixed price contracts I'm sure there would be a lot of contracting being done.

[charliep]

craig

Did some thinking and likely won't have a good answer to your question but here is a crack at it. The real way would be to check across the border and find out what their new crop bids are.

I started with the daily pricing contract prices and noted that the DPC is any where from $8 (CWRS) to $17/tonne (CPS) over the current PRO. This price should reflect the value of western Canadian wheat in US markets (likely too low but is a start). I then added in carry in the market - about 15 cents/bu May to Dec in both MGE and KCBT (Cdn $6/tonne).

Add the above together and I suspect your 50 cents/bushel premium to the PRO/FPC is not to far out for new crop in an open market new crop deferred delivery contract for October delivery.

A frustration for me is to get a better handle on what the alternative wheats should be worth. I note new varieties of winter wheat and prairie spring put them more solidly in the quality paraments of hard red winter wheat and perhaps even to the point of catching up to spring wheat. Some of these wheat could easily be applied against sales like have occurred recently to Iraq. At the same time, hard red spring wheat yields have been increasing so the yield differential is not what it would have been 10 years ago. Long rant likely about nothing but I wish there was better flow of market information about customer needs and the fit of some of the newer varieties in meeting these needs.

[charliep]

One question you ask that I don't have an answer to is how the CWB manages their market risk around basis contracts. In an open, the grain companies would manage their basis risk against cash sales/basis contracts signed farther up the supply chain.

[charliep]

I had a contact do some checking and current new crop bids for US hard red spring wheat (14 protein) are about US $4.10/bu (about Cdn $4.70/bu or Cdn $173/tonne). This is a North Dakota price.

The fixed price contract yesterday was $210/tonne and a Manitba CWB deduction is about $53/tonne. The end result is a locked in price of $157/tonne.

They didn't capture Montana values or hard red winter wheat new crop bids.

[craig]

Another concern I have relates to only locking futures on the fixed price contract. Early indications are that western Canada will plant lots of wheat this spring. I am concerned that this might encourage the CWB to keep basis wide even if wheat prices decline. Is that a legimate concern.

[charliep]

No gurarantees on a zero basis. I would likely use $10 under in my decisions.

Could things get really ugly (say $30 or $40 under)? Possible but there are some things that would put a low probability on this. Will the relationship between MGE and KCBT get wider? Possibly but not likely - they are reasonably substitutable. The fixed price contracts/basis also need to maintain some relationship to the upcoming PRO forecasts.

Having said all this, the CWB is totally in the drivers seat in how this basis is determined - no competition or need to reflect a market value.