Charlie or Lee

[Riley]

The recent run up in wheat prices has been most welcome, but when I look at prices that are being posted in Montana or in Portland for HRW, I can't help but feel we are being left behind. Firstly...how closely does our CPS wheat follow HRW wheat prices and why do we not get paid for protein for our CPS when U.S. producers are paid for protein for their HRW wheat? Today, HRW wheat 13% protein in Portland is being quoted at $6/bu U.S.

[charliep]

I am going to do the civil servant soft shoe and dance around your question with the honest answer I don't know.

I'll start off with admitting that I am confused by the quality characturistics of CPS wheat and how it fits in the quality/use world relative to US hard red winter. CPS started as a noodle wheat which generally was slightly softer (mid hardness) and lower protein. My understanding (will have to get help) is that the newer varieties have quality characturistics closer to that of hard red winters (including higher protein). Market signals are pretty much masked in our current system with a move to variety specific IP the only way to get to true value.

What will even confuse me more is if Canada pushes further into the ethanol world. My understanding (again, an economist - not an agronomist/chemical engineer) is that harder kernels and protein may not be needed all that much. As Canada moves forward to the new world, classes as we know them today and KVD will become more of an impediment to competitiveness.

On your price question, I will give you the standard CWB answer and highlight you cannot compare a spot price to a pooled (read average price). I also highlight the graphs on the daily price contracts - they are showing the rally. My recommendation will be to use a portion of daily price contracts in the coming year for just such a situation.

[melvill]

Here's a more interesting question: If Canadian ethanol production increases as a result of a federal renewable fuel mandate, will we want CPS wheat to contain higher protein and better milling qualities similar to US HRW wheats? Ethanol producers likely don't want or need protein. Will we grow current (or newer) CPS varieties that meet the needs of ethanol production and other, maybe newer varieties, that better meet milling requirements?

[Riley]

As a follow up to your response. Last year CPS red basis levels were somewhere around $5/t under the futures for much of the year. This year you can add $20/t to that figure. If the basis reflects the discount/premium compared to HRW wheat (KCBT futures). Why are CPS Red basis levels at such a steep discount to HRW? Did CPS all of a sudden become undesireable in the world market? I realize that spot prices are not the same as a "pooled" price but there must be a market for HRW wheat somewhere at these prices...or they wouldn't be doing it. Would they?

[melvill]

Riley, I, too, am scratching my head about how weak this year's CWB wheat basis levels are for all types of wheat. I think part of the weakness is related to how they calculate (the formula they use) the basis they offer. The Board's basis formula includes what they call a "projected futures value", which, in itself, introduces quite a degree of variability between months and years.

However, I, also, scratched my head about how strong CWB wheat basis levels during were, for CWRS in particular, during late September and October of last year.

One possible explanation for this year's poor basis is the costs of risk management, particularly for the Canuck Buck. The Board uses Canuck Buck call options to manage that risk. Recent exchange rate volatility has made dollar options more quite a bit more expensive than last year. However, given that, I still wonder at the weakness of all wheat basis levels.

Another thought that has crossed my mind is that last year the Board offered basis levels that were much too strong when compared to the actual sales they made over the crop year.

[charliep]

I would also look at the spreads between Minneapolis (hard spring) and Kansas City (hard winter). Not long term historical but provides an indication of the changes that have occurred.

http://www.kcbt.com/wheat_futures_spread_charts.asp?page=spreads

Does any know where you can get a daily long term spread chart KCBT and MGE?

[crusher]

Charlie,

I found a daily chart of Minnie vs Kansas at futuresource.com. http://www.futuresource.com/charts/charts.jsp?s=MWN06&o=KWN06&a=D&z=650x450&d=HIGH&b= bar&st=

Not sure if it will link so try futuresource.com, grains charts in bottom right corner, pick Minnie wheat and then compare to Kansas. Not the spread chart you are looking for, but does show the two.