How Many Farmers Have Signed Daily Pricing Contracts

[charliep]

Just a note I will continue to suggest signing up at least some quantity committed under the CWB daily pricing contract. Has been a good deal this past year and is not (at least in principle) tied to the CWB pricing pool (based on an average of US northern state prices). Is a production contract which needs to be signed before July 21. Pricing opportunity starts August 1.

This program (daily pricing contract) can also be use to price old crop on storage tickets and carried into the new crop year for pricing purposes. You cannot price old crop deliveries using a 2006/07 fixed price contract. Your risk factors will be the market itself and how the CWB handles posted prices in between July 22 (old crop) and August 1 (new crop). My assumption is this will be seamless in that a cash price is a cash price with no adjustments between pooling years other than normal market fluctuation.

[charliep]

I encourage everyone to look at the historical pricing section in the CWB web site.

http://www.cwb.ca/public/en/contracts/ppo_workbook/pdf/2005-06/2005-06dpc.pdf

All in hindsight but between the opportunities presented by the spring price endorsement (Alberta) and daily price contract, there have been opportunities to add significantly to revenue in 2005/06. Can't say whether will happen again in 2006/07 but I would be looking at ways of keeping the opportunities open for even a small portion of your expected production.

[TOM4CWB]

Charlie;

I am getting the same message from Cargill (on DPC pricing of 05 harvested wheat after Aug 1 06)... but have had growers tell me the other grain co's say only pooling is allowed.

This seems to be a Very muddy and poorly explained PPO policy... what is what?

Is there a logical explanation why FPC are not avaliable but DPC would be?

[charliep]

Just confirmed that you can price old crop deliveries on a DPC.

Should let the CWB answer but my guess is the decision to not allow old crop pricing on an FPC comes down to how the CWB handles the risk portion. All fpc contracts are related to the pool return outlooks/what they can hedge across the whole pooling year. Pulling a lot of pricing across the end of a crop year can have a major impact on both pooling years. Happens anyway when people carry grain in the normal manner/go into the next pool.

The dpc is simply a daily cash pricing tool and should not impact pool returns although I think there are risk mitigation strategies here. The dpc is one of the black holes at the CWB where I do not understand the pricing function (other than should reflect the US daily cash market) and how the CWB handles risk. A challenge to Vader and others is to make this process more visible.

[silverback]

Neighbor was told that a DPC is no good for Alberta farmers, better for those in Manitoba. How is that possible?

Any truth to it?

Why do you have to commit the tonnage and then wait to see what the price might be? Why couldn't you price it at the time of commitment?

[charliep]

Not sure why DPC would be better for Manitoba versus Alberta. These contracts also use standard CWB deductions. The only benefit I can see in Manitoba is the ability to do buy backs and sell into a higher priced US market that have a different set of market fundamentals than that of the overall CWB pools (particularly this year when the Dakoka's are suffering drought. The buy back process will likely grab onto this benefit but that has yet to be seen.

Your question about signing up a production contract before you price is a good one I don't have an answer for. Some one from the CWB would have to answer.

I highlight again the recommendation to use this contract - particularly if you are carrying 2005/06 deliveries over into the new crop year and pricing 2006/07. If the CWB tanks the prices first week of August (could happen), I would be prepared to hold off pricing (leave in the pool) and use the DPC later in the year.

I will really admit to getting frustrated/mad if farmers do like last year and contract 80,000 tonnes out of a 500,000 tonne allocation. The program is not perfect (still want a daily cash price that reflects a sales opportunity and is priced outside the pooling process) but is better than some when included in a marketing plan for a percentage (likely small) of the crop a farmer will be harvesting.

[melvill]

There is lots of misinformation out there about DPCs (and, in fact, all the Producer Payment Options).

Had a call from a producer the other day saying the grain buyer he deals with said a DPC was only worthwhile for producers intending to ship their own wheat to the U.S. Scarey, eh?

[charliep]

Get the same calls Lee.

One thing that is interesting is to compare spreads on the DPC versus the PRO. The 1 CWRS (all proteins) verus 2 CWRS is $5/tonne. The spreads on the PRO are much wider. You are at the CWB's mercy but these is anywhere from $32 to over $50/tonne better price to be had by carrying into new crop based on today. The question of the hour will be how the CWB makes the pricing transition from old to new crop.

[crusher]

Okay, I'll bite. I'm hauling in some 3CWRS low protein on 2005/6 contract. I was going to roll pricing into 2006/7 pool. Can I use DPC and how? Please go through complete process. I was also under the impression when the DPC first came out that it was intended for the buyback marketers and I haven't given it any thought since.

[TOM4CWB]

Crusher;

Before July 21, you sign up the tonnage you would like to sell through the DPC.

After August 1 you can sell it by locking in the DPC.

It might be somewhat difficult to match futures and DPC... if you want to lock in now. Would you use Sept MGE? Probably.

THe CWB is in control of the basis... on the DPC the day you price... and the spreads between grades.


CWRS you planted for 06 harvest, an option to still go to the 06-07 pool with your 3CWRS... After Aug 1; but then this could conflict with FPC that would be locked up at a good price today for 06 harvested wheat.

It would certainly be much cleaner if either your 3CWRS or your 06 CWRS were deliverable against a FPC you should be able to sign up today.

THere is no excuse not to allow either of these... as the switch to the 06-07 pool of your 3CWRS already "distorts" the 05-06 pool... if that were the concern.

A Daily Cash price is what we need.

The CWB decisions not to allow cash pricing may well cost the taxpayer big bucks in subsidy payments... plus CWB grain growers loose double... as CAIS doesn't pay back 100% of the loss.

[charliep]

The forms and a good description of the program are on the CWB website.

The steps clipped and pasted from this website. (http://www.cwb.ca/public/en/contracts/daily_price/index.jsp)

Step one: Sign up tonnage to the program from June 1, until July 21, 2006.

Step two: Price the reference (base) grade between August 1, 2006 and July 31, 2007.

Step three: Apply deliveries against the contract thereby locking in the cash spreads between the applied grades and the reference grade.
Note: Step 2 and 3 can occur in reverse order.

Don't know where the rumor was only good for people who sell into the US/use the producer direct sale got started. Has been/is available to everyone. Encourage all to look at the relationships between the DPC, FPC and the PRO from this past year in the CWB website.

http://www.cwb.ca/public/en/contracts/ppo_workbook/historical.jsp

[charliep]

Crusher

I thought I maybe should go over the whole process. Not really much different from what occurs with other contracts.

1) Deliver grain on your 2005/06 contract and put on a storage ticket.

2) Fill out and fax the CWB form indicating the volume and type of wheat you will be pricing (can be old crop). Form is on the web site.

3) Review the DPC prices and spreads starting August 1. You still have a decision as to when to price.

4) When you like the price, inform the CWB indicating it is grain held on a storage ticket. They will have rules in terms of contract numbers etc but the process is not likely much different than when you use to convert a CWB basis contract into a fixed price.

The frustration is why we have these two programs (FPC and DPC). They are different and involve different elements of risk (with risk being defined as a benefit or penalty).

The other thing Tom4cwb is asking is why you even have to go through these processes at the end of a crop year. The CWB easily could offer cash pricing in June and July with the risk sitting in the farmers hands who chooses to hold grain that late in the crop year (assuming full delivery). Offering a second pooling period would also move farmers down this road (as Vader has suggested).

[charliep]

Too many postings by me but I should note you can cash in your storage ticket after August 1 (ie. collect your 2006/07 initial payment) with a caveat you will have locked in the DPC grade and protein spreads on that day (you may want to delay a little to ensure you don't hosed on the spreads). Don't know how long it can last but you can hold off on the DPC until you get a base grade price you like and then cash in. You can deliver first and lock in a DPC later.

[rook]

Charlie, what are the differences between FPC and DPC? As I understand it, FPC priced off MGEX and DPC priced from Montana and ND. Is this correct?

[charliep]

The fixed priced contracts and basis levels are priced as a relationship to the most recent pool return outlook. You are in effect taking an early payment versus waiting for the series of adjustment, interim and final payments. The CWB risk management department hedges their futures price risk relative to the overall pool returns across the whole pooling year (September 2006 to July 2007). Their basis risk (starting this year) is protected with the basis adjustment factor which anyone who signed/will sign a basis will become very familiar with this fall. The spreads for grades and proteins are based off initial payments. THIS IS NOT A CASH PRICE.

The daily price contract is based off the average price of selected US delivery points. Price and grade spreads are based off the US markets that are surveyed. THIS PRICE IS A CASH PRICE BASED ON THE MARKET (NORTHERN US PRICES). No idea how the CWB manages the risk involved in this contract relative to overall pool returns (logic would say keep this program separate from the pricing pools but I suspect not the case).

Neither process is visible as to where the prices come from.