CWB Adjustment Factors

[charliep]

I will note the adjustment factors on all the fixed price constracts are hefty and not in your favor for anyone who will be signing an FPC/basis contract over the next 13 business days.

Questions.

Do you know what the adjustment factor is? Why is this adjustment made?

How is it calculated?

What impact does it have on your locked price?

This issue started brewing last spring and now the chickens have come home to roost.

[charliep]

I am just going to put in Lee and my comments this spring.

http://www.agri-ville.com/cgi-bin/forums/viewThread.cgi?1144885711

[crusher]

Any suggestions on how to MAXIMIZE this bull market? Is the adjustment factor calculated when you lock in the futures or the basis? Looks like the adjustment factor narrows in on down days and widens out on up days. Therefore lock in basis on dips and futures on rallies. Looks like we need a strong close for Kansas City before it breaks through resistance - then look out!! If not then - look out on the downside! I don't think we're going choppy sideways.

[charliep]

crusher

Lee is not around today so I will have a crack at (looking for others help).

I will note first the basis is not a market signal but rather the ability to lock in a relationship with the PRO/total payments. A cash price provides a signal about what the wheat is worth (reflects what a buyer is willing to pay minus costs of getting it to them) and how badly it is needed (delivery needed right now - narrow basis or needed later - wide basis.

So you are going to get mixed signs. As the market rallies higher, existing sales are going to have more of a drag factor on the market. The adjustment factor is going to get more negative. The CWB is likely to put more cushion into their basis/relationship with expected CWB total payments (no different than a grain company would on canola). The PRO day is also a day that needs to be watched with an increase in payment forecasts likely. That may mean basis levels turning less favorable (i.e. more ugly). The final thing to watch is spreads. There is a hefty old/new crop inverse in the market (keeping in mind new crop in the US is in June because of winter wheat harvest and the CWB pooling year carries right on into September). This inverse will be reflected in both the PRO and pricing options.

Too long and complicated above. Your strategy of watching basis levels on days of lower futures prices (still have to get the pencil out to confirm) and selling the futures (locking in a price) on rally days likely works. There is a risk factor around October 26 when the next PRO is announced.

With all the complexity I have added here, I have to wonder why the ability to wonder into an elevator and seeing a cash price posted on their bulletin board is such a bad thing. The DPC is a lot better product than the FPC. You can have the discussion about why only available from June 1 to July 20, not being able to use for forward pricing prior to Augutst 1, only 500,000 tonnes and finally why not available 365 days a year with the CWB.