CWB protein payments, do they reflect the Market?

[TOM4CWB]

Charlie and Tom,

I was at the www.ams.usda.gov/mnreports/JO_GR110.txt site linked to the Minneapolis Exchange site and found these prices for Portand on Jan 12, 2001:

Exporter offers on Thursday night for March shipment F.O.B. ship in dollars per bushel:

US 2 or btr Hard Red Winter Wheat, 13% protein $4.16 up 2

US 2 or btr Northern Spring Wheat, 13% protein $4.21 up 1

US 2 or btr Dk Northern Spr Wheat, 14% protein $4.31 up 1

US 2 or btr Northern Spring Wheat, 14.5% protein $4.40 up 1

This shows me that when I have #1CPS with 13% protein and a falling # over 300, it should be worth 7.5 cents/bu less than a #2CWRS 13% protein wheat.

Yet the CWB has the spread 10 times this spread, Why?

#2CWRS 13%protein to 14.5%protein is about twice the protein premium that Portland pays, looking at these Portand prices. Why?

What really are the customers out there paying for protein, and what good does it do to pool all the prices and hide reality so I cannot know what the market is actually asking for vs. what my farm can most efficiently grow? I cannot understand why you defend a system that wastes billions of dollars of farmers resources, because of a flare bent on communist principals that were proven faulty decades ago! When can I expect to see changes, will the new Fixed Price Contracts allow my product to seek out the highest price?

[TOM4CWB]

I wonder why the CWB will not even respond to this question? Is this not a worthy of open discussion and does the CWB not have an obligation to their owners, we farmers, to tell us why they are selling our grain in an uncompetitive and unfair manner?

This week the Portland USDA Report for Friday the 19th says that #1 Hard Red Winter 13% and #1 Dark Northern 13% are only $.06 CDN per bushel different. Further the spread between 13% and 15% is $.24 US. Canadian price spreads for #1 and #2 CWRS 13% to 15% protein can be checked by looking at the initial prices. They determine the protein premiums which are paid to Fixed Price Contract holders who are not in the Pool account. This 13-15% spread is about $.38 US, or more than 50% higher than what the Portland export market is charging.

Adrian Measner at the Wild Rose Convention last week in Red Deer Alberta emphatically told us that the wheat market is extremely competitive, and that if the CWB didn't compete, our buyers would buy from some other country!

What is the truth? Why does the CWB continue to refuse to admit that the pooling accounts and initial price spreads do not reflect the selling prices that actually are ocurring?

Jim Robbins in the Jan 18 Western Producer stated about railway competition, "The panel said it rejects the shipper argument that the mere existence of differential pricing shows a lack of competition. "That astounds me," said Robbins. "I would have thought that is economics 101. If there was real competition, you couldn't get away with differential pricing."

What about the CWB and our wheat prices?
It obviously does not allow competition or our prices would be on par with US prices!
Please tell me what I am missing, what is it?

[TOM4CWB]

I wonder when the CWB will finally answer this subject?

Well another week and here are the Portland prices one more time.

Exporters offers on Thursday night for March shipment F.O.B. ship in dollars
per bushel:
US 2 or btr Hard Red Winter Wheat, ord.% protein $3.88 dn 4

US 2 or btr Hard Red Winter Wheat, 11.7% protein $3.95 dn 4

US 2 or btr Hard Red Winter Wheat, 13% protein $4.05 dn 4

US 2 or btr Northern Spring Wheat, 13% protein $4.13 unch

Looks like the spread is $.08 this week!

I read in the Western Producer,

"CWB contracts offer premiums for new wheats"

"Crystal (CPS Red)combines the agronomics of the CPS class with the baking characteristics of hard red spring wheat, giving the board a product that can compete directly with American hard red winter wheat."

Well what more proof do we need, this is directly quoted from Page 13 of the Western Producer January 11, 2001 paper.

When can I expect a reply? Why are the spreads between CPS and CWRS so wide, or is this article a lie too? What am I to beleive?

[charliep]

At the risk of getting sucked into this quagmire, I will launch into my experience with the process. I may not have the answers to your question but at least I can explain how things are done. Your question is really two parts. The first is how do CWB merchants price a wheat like CPS red (a little of this has to do with timing as well. The second has to do with how the returns/spreads with wheat are determined in the pooling process. I will divide the answer in two to keep the two processes separate.

Charlie P.

[charliep]

The way the CWB prices grain to customers is exactly the same way a private grain company does.

1) what are the quality characturistics of the grain/oilseed and what market does it have a fit into?
2) What customers/importers use this type of grain?
3) who is our competition into this market? what is their pricing likely to be based on previous sales (this may include basis calculations with US futures markets)? Can we obtain price premiums based on better quality grain (protein, gluten strength, color)? Do we have to discount because we are the one with the poorer grain? Do we have a freight advantage or disadvantage to the customer port/mill? How much? Is this a one time sale or a part of a package? Is credit involved? Does the sale have a fit with the other grain/oilseed programs?

After starting and stopping with a detailed way sales are made, I'll try to keep keep the explanation short. Prairie spring wheat (both red and white) are sold into a number of markets where hard red winter wheat isn't the competitive pricing reference point. A main area of the world that prairie spring red has been Iran and the competition here is likely European wheat, US soft red winter and Australian Standard white wheat. These wheats would be sold at a discount to US hard red winter (both Portland and the Gulf). similar comments could be made about the S.E. noodle market.
Our prairie spring varieties are getting a lot better but are not up to the quality standards set by Australian wheat. I also suspect that countries like Iran prefer (likely willing to pay for) 2 and 3 CWRS wheat. Countries like Iran buy wheat to specifications as opposed to specific grades/classes.

The spreads CWB uses has to reflect the price relationship between hard red spring wheat and the prairie spring wheat classes in all markets it is sold in.

I will talk about how protein/grade/class are set in the CWB pooling process in the next week.

[TOM4CWB]

Charlie, I find it interesting that we are sacrificing yield for quality in the CPS class, and now you are saying that we should allow the CWB to give the extra quality away for nothing. This is costing our farms substantial amounts of resources. CWES has hard qualities that could be easily blended with CPS creating a wheat that would perform as well as CWRS. Is the problem that the CWB simply doesn't care because the volume of CPS and CWES is too low to provide a consistent supply, therefore sold at discount prices to leftover discount buyers?

[charliep]

I still own an explanation on price spread withing pools. I admit to having some of the same questions you do about the different classes of wheat/our marketing programs. Just some ideas though. It takes a long time to introduce a new variety/class into the system, particularly when the competition (other exporters) have a good track variety and our varieties historically have not met the standard. This is changing but people have long memories. A good example is Herrington barley. Why is herrington stir the malt barley of choice given its agronomic problems. The answer is this is what the customer wants. The other answer is better identity preserving programs (this has cost by the way) where we don't sell classes but we sell varieties with guaranteed quality specs. The trade/CWB can sell grain basis the fit in final products. The final comment is I have sold/merchandized grain and what you see sitting behind the desk is quite a bit different than might you might think in the outside. I did my best to sell product at premiums basis quality characturistics but the customer is king/call the shots. They cut the cheque.

A case in point is your 13 % protein prairie spring wheat. You are right this does have value but could it be packaged in a way to provide value to a customer - enough supplies in addition to your own to fill a boat/domestic order one time let alone something the customer can really on getting over an extended period. A grain like you are talking about is likely best suited to the domestic feed where the protein has value/it can be segregated. API in Red Deer would be another where the product the CPS can valued basis its quality and protein.

[TOM4CWB]

Thanks for admitting that protein and good quality is worth money, in both CWES and CPS.

Now comes the hard question.

If the monopoly of the CWB prevents me from finding a market outside of what the CWB sales staff are willing to work with, why is the CWB so mean spirited on buy-backs for CPS and CWES.

It is obvious when the PRO for CWES and CPS drops in January again that the CWB does not have planned sales that are extracting a premium for this wheat.

If all their objective is, is to sell #1 and #2CWRS, at decent prices, then please tell us so we can remove CWES and CPS from the Monopoly.

Or does the CWB need to maintain control over CWES and CPS, because they are afraid that we would do a better job of marketing than they could, and then CWRS production would decline and end the CWB in a different way, no production to sell?

[TOM4CWB]

I have yet to get anyone to respond on the CWRS Protein spreads!

This is the Feb 2 report on Portland Export prices, again from the Minneapolis Grain Exchange Cash Links site.

Exporters offers on Thursday night for April shipment F.O.B. ship in dollars
per bushel:
US 2 or btr Soft White Wheat $3.13 up 2
US 2 or btr Western White Wheat $3.14 up 2
US 2 or btr Hard Red Winter Wheat, ord.% protein $3.81 dn 2
US 2 or btr Hard Red Winter Wheat, 11.7% protein $3.87 dn 2
US 2 or btr Hard Red Winter Wheat, 13% protein $3.96 dn 2
US 2 or btr Northern Spring Wheat, 13% protein $4.08 dn 1
US 2 or btr Dk Northern Spr Wheat, 14% protein $4.16 dn 1
US 2 or btr Northern Spring Wheat, 14.5% protein $4.24 dn 1

Again we have $.16 US spread in the protein between 13 and 14.5, or at 1.52 conversion, or $.24 CA funds.

The CWB spread between #2CWRS 13 and 14.5 initial prices are:

#2CWRS 14.5 Protein basis Vancouver B.C.$ 4.71
#2CWRS 13.0 Protein basis Vancouver B.C.$ 4.24

This leaves the spread for CWRS protein that the CWB discounts my Fixed Price Contract at is $.47 CA per bushel.

This is twice the spread that the US grain market is able to get from the international market place.

The CWB’s Adrian Measner, stated at Wild Rose Agricultural Producers annual meeting in Red Deer Alberta, this January, that the CWB was in an extremely competitive market place, and that since the USA has such a surplus of wheat the international grain customer would buy somewhere else if we are not directly competitive with other major grain exporters.

My questions are:

1.How can we trust the CWB grade and protein spreads, when they show no resemblance to internationally traded wheat prices?
2.DO the CWB Pooling accounts bear any resemblance to what the real world pays for our wheat?
3.Does the CWB quote one price as a selling price, but when the contracts are settled, are they actually different spreads?
4.Is there actually two sets of books, one for the real world of international grain market settlement prices, and then another set to justify the CWB pooling accounts, the only set the auditors, CWB Directors, and farmers have access to?

[TOM4CWB]

Hi guys,

I am still waiting for some answers!

Exactly how does the CWB come up with class, protein and grade splits for the pooling accounts, especially now that they determine my basis on the Fixed Price Contract Programs?

I hear there is a pretty good surplus in the contingency fund, since it is comming out of my pocket, could you look at some system to return a final payment on this pool?

[charliep]

Sorry for the delay but I have been taking a bit of a break from Agri-ville to let others have the opportunity to speak.

Your last question is the right one - that is how does the CWB establish the grade/protein/class spreads.

The price the CWB sells for/spreads used are determined by the market. The market could be Portland/Australia for for S.E. Asain sales, US Gulf/Argentina/EU for S. American, the EU/Australia for middle east sales, The process the CWB sales uses in selling grain is no different than that used by grain companies. Without going into details, the spreadsheets that are used to doing CWB pricing calculations are no different than that used by a grain company.

The real question is that after money is deposited in the pool, how is it distributed to farm managers. In a brief answer, the CWB looks at the price relationships in the different markets it sells into over the whole year versus a given day or a given market. As an example, protein spreads are an average value for the whole year (starting with a forecast relationship in the PRO and ending with actual values at the end of the pooling period). The US market is the main protein pricing point (keeping in mind spreads on HRW may differ from that of HRS) but the CWB will also look at pricing in other markets.

For classes, the CWB has to look at price relationships between the wheat we produce and that of our competitors. As an example, our medium quality wheats (CPS, HRW, 3CWRS) are not sold so much in competition with US but also Australian, Argentine and EU wheat (e.g. Iran, most of S.E. Asian). The spreads are again averages over the whole pooling period and have to reflect the pricing relationships in all markets.

An interesting challenge I will throw back at you is how pricing signals will come back to farm in a none CWB world? For example, Iran comes to Canada/the trade for 1 MMT of wheat that has to meet certain specs (basically 2 CWRS with 3CWRS or 1/2 CPS at set discounts). The competition is Australia and Europe.

[TOM4CWB]

Charlie,

I find your answer interesting.

Throwing all the money for non-durum wheat into one pool sure makes it simple and less accountable!

Ontario had to be more accountable, so the had more pools!

I say with respect to Iran, Korea, and other lower price lower quality markets that the CWB will only be responsible a responsible marketer when farmers actually have the right to decide when and if they want to participate in these sales!

I can only make the decision for my own farm! Other farmers have different costs and reasons for selling, they must have the right to decide when a discount sale is appropriate, if it is ever to be in their interests!

Expropriation is not fair, if a farmer does not want to sell at the lower price!

Alternatively, this fall many farmers may have been very happy to have had early shipment and payment for their lower quality wheats, and should have had the right to sell their wheat if it was in their best intrests at the time!

I am not wise enough to make the decision for them, are you?

If you and I are not wise enough, what makes the CWB any smarter than we are?