I've been thinking. I'm not much on arguing on philosophical grounds - I'm more technical in my approach. When someone says I can't do something, or something can't be done, I try to find a way around it. Sorry for length of this, but I want to float an idea...
The CWB is concerned that in an open market, it couldn’t survive, partly because the pooled price (fixed initial, etc) would not appear attractive in most market situations. They say the pool won’t be able to compete with spot prices, especially in a rising market.
Today, the CWB provides an Initial Payment that is a flat price – it covers both futures and basis components of the ultimate price. But think about it for a minute – any price benefit coming from the CWB is solely in the basis – not futures. The CWB can’t get a better futures price, but assuming it can get premiums in the cash market, it can get a better basis.
The Initial Payment is set conservatively because of price uncertainty over the whole crop year and to avoid deficits. Since most of the price of grain is reflected in futures prices, most of the price change the CWB is concerned about would show up in futures. So if the CWB didn’t have to worry about variations in futures prices, it could offer better prices (and pricing signals) up front. Instead of a flat price Initial Payment, the CWB could offer an “Initial Basis Payment”.
The concept would work like this:
Prior to the beginning of the year, the CWB would establish its Initial Basis Payment (IBP). Let’s say for argument’s sake that the IBP for #1CWRS 13.5 is 60 over – that is, 60 cents per bushel over the nearby Mpls futures (the futures are quoted in USD, applying the basis converts the final price to Canadian dollars – just like they do with corn in ON). Data from the CWB shows that the PRO tends to be about this much above Mpls wht futures.
You could commit a tonnage of wheat into this pool, accepting this basis. Either prior to delivery or upon delivery, the grain would be priced – at your sole discretion. You would manage the flat price risk just as you do with canola.
So with the recent run up, you could price your #1CWRS 13.5 (at 60 over) at around $5.65 per bushel (compared to today’s Initial Payment of $3.93 per bushel). The CWB could manage the price risk like every one else - with futures.
Upon completion of the pool period, the CWB would figure out how much it can pay beyond the IBP and pay it as a final payment. Because the total risk to the pool is lower, the IBP should represent a greater proportion of the final payment than currently is the case – more money up front, not as much as a final.
Flat price decisions would be made individually by each farmer. Assuming there are farmers who would rather have the CWB continue to price their wheat, as an option the CWB could offer a conventional Initial Flat Price Payment – just as is the case today.
With this pricing mechanism, the CWB could still maintain the pool and it wouldn’t be subject to the problems of a rising market; the effective pool price would rise along with the rising market (futures). Also, a pool of this sort wouldn’t be dumped on in a falling market either.
All farmers in the pool would still benefit from the CWB equally.
Here we would have attractive pooling prices in an open market. Both systems working side-by-side.
This also would take away the need for all the complicated Fixed Price Contracts and Basis Payment Contracts that the CWB offers today.
This pooling "issue" overlaps with another problem posed by the pro-CWB camp – why would the grain companies agree to handle CWB grains when they have their own grain sales programs to satisfy. The answer to this is simple – the CWB needs to stop thinking like a grain company and start thinking more like a farmer. If the CWB contracted, let’s say 10 million tonnes of grain with farmers it could easily approach grain companies and say, “We control 10 million tonnes of grain. What’ll you offer in terms of handling services?” If you don’t think that would attract some competitive behaviour, you aren’t thinking like a grain handler with excess capacity. And once the CWB locks up handling arrangements with grain handlers, its basis just got even more defined.
Okay – get the slings and arrows out and tear this thing apart. I can take it.
The CWB is concerned that in an open market, it couldn’t survive, partly because the pooled price (fixed initial, etc) would not appear attractive in most market situations. They say the pool won’t be able to compete with spot prices, especially in a rising market.
Today, the CWB provides an Initial Payment that is a flat price – it covers both futures and basis components of the ultimate price. But think about it for a minute – any price benefit coming from the CWB is solely in the basis – not futures. The CWB can’t get a better futures price, but assuming it can get premiums in the cash market, it can get a better basis.
The Initial Payment is set conservatively because of price uncertainty over the whole crop year and to avoid deficits. Since most of the price of grain is reflected in futures prices, most of the price change the CWB is concerned about would show up in futures. So if the CWB didn’t have to worry about variations in futures prices, it could offer better prices (and pricing signals) up front. Instead of a flat price Initial Payment, the CWB could offer an “Initial Basis Payment”.
The concept would work like this:
Prior to the beginning of the year, the CWB would establish its Initial Basis Payment (IBP). Let’s say for argument’s sake that the IBP for #1CWRS 13.5 is 60 over – that is, 60 cents per bushel over the nearby Mpls futures (the futures are quoted in USD, applying the basis converts the final price to Canadian dollars – just like they do with corn in ON). Data from the CWB shows that the PRO tends to be about this much above Mpls wht futures.
You could commit a tonnage of wheat into this pool, accepting this basis. Either prior to delivery or upon delivery, the grain would be priced – at your sole discretion. You would manage the flat price risk just as you do with canola.
So with the recent run up, you could price your #1CWRS 13.5 (at 60 over) at around $5.65 per bushel (compared to today’s Initial Payment of $3.93 per bushel). The CWB could manage the price risk like every one else - with futures.
Upon completion of the pool period, the CWB would figure out how much it can pay beyond the IBP and pay it as a final payment. Because the total risk to the pool is lower, the IBP should represent a greater proportion of the final payment than currently is the case – more money up front, not as much as a final.
Flat price decisions would be made individually by each farmer. Assuming there are farmers who would rather have the CWB continue to price their wheat, as an option the CWB could offer a conventional Initial Flat Price Payment – just as is the case today.
With this pricing mechanism, the CWB could still maintain the pool and it wouldn’t be subject to the problems of a rising market; the effective pool price would rise along with the rising market (futures). Also, a pool of this sort wouldn’t be dumped on in a falling market either.
All farmers in the pool would still benefit from the CWB equally.
Here we would have attractive pooling prices in an open market. Both systems working side-by-side.
This also would take away the need for all the complicated Fixed Price Contracts and Basis Payment Contracts that the CWB offers today.
This pooling "issue" overlaps with another problem posed by the pro-CWB camp – why would the grain companies agree to handle CWB grains when they have their own grain sales programs to satisfy. The answer to this is simple – the CWB needs to stop thinking like a grain company and start thinking more like a farmer. If the CWB contracted, let’s say 10 million tonnes of grain with farmers it could easily approach grain companies and say, “We control 10 million tonnes of grain. What’ll you offer in terms of handling services?” If you don’t think that would attract some competitive behaviour, you aren’t thinking like a grain handler with excess capacity. And once the CWB locks up handling arrangements with grain handlers, its basis just got even more defined.
Okay – get the slings and arrows out and tear this thing apart. I can take it.
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