CWB Fixed Price Contract & The Recent Frost

[lakenheath]

I am assuming, based on what is happening this morning in the grain markets down south, that wheat is going to climb significantly in the next short while.

There are going to be some pricing opportunities with the fixed price contract (assuming the CWB is handling wheat this marketing year).

My question is, how does a person approach the mystery basis (it shouldn't even be called a basis...like calling a dog a cat)?

Is the CWB going to cover their butts by dragging the HRSW basis to a negative level? I can't imagine them increasing it (althought it is historically low in terms of the fixed price contract history).

Any thoughts? The price still has to climb quite a bit for me to start pricing, but when the price is at an attractive level, what the heck does a guy do with the basis?

Maybe Vader can weigh in on this.

[charliep]

I would still lock in futures only on the rally and leave the basis side to strenghthen on CWRS/CWWS and CWES. CPS basis although not great is likely one worth considering both.

The issue last year (and perhaps this year) is tighter supplies in the mid quality wheats and relatively plentifull high quality/protein milling wheats. Protein spreads have been narrower than normal as a result. I won't second guess the impact of the cold temperatures on US HRW/SRW but this would seem to impact the mid quality wheat (realizing that high protein HRW is a substitute for spring wheats).

The US winter wheat was in relatively good condition going into the cold temperatures but the issue will be how far along the crop is. The story has yet to be told on the North American spring wheat. Winter wheat conditions in Europe is relatively good. China is maybe something to watch.

Will take every opportunity to recommend the daily price contract in the coming year realizing can't contract until June 1 and can't price until august 1. Like the pricing process much better for DPC including the spreads. Hopefully the CWB puts some clarity around this program quickly so farm managers can start including in their marketing plans.

[sawfly]

a while back i did a 6.20 dec with the board without a basis.
i had hoped with the last couple weeks price drop that the basis would improve. no such luck.
i was afraid if wheat price jumped the basis would get worse.
it is a mystery.

i know i should be asking the board but
Charlie do you have any ideas what factors would cause the basis to change either way?

I will try the DPC this year

[charliep]

Likely can help explain although I won't be of much help forecasting.

The one issue I will note is the MGE delivery specification is closer to a 2 or 3 CWRS 13.0 protein. Went to MGEX to find the following:

DELIVERABLE GRADES:
No. 2 or better Northern Spring Wheat with a protein content of 13.5% or higher, with 13% protein deliverable at a discount.

Would have to go into the description of No. 2 grade but my understanding is fairly wide tolerance on things like fusarium damaged kernels. Normal milling wheat in the US has higher standards (close to our 1CWRS) and therefore premiums over futures. These premiums vary year to year based on crop quality.

So we have the situation of US market that adds premiums on for quality characturistics versus CWB fixed price contracts which are based off 1CWRS 13.5 and from there discounts. A quick fix might be to make the base grade for fixed price contract (ie. 2CWRS) more similar in quality to the deliverable grade on US futures contracts. At least would be more comparable.

The other issue is that the fixed price contract is not hedged off one futures month directly but instead hedged across several contract months over the whole pooling period. You are also not locking in a relationship with a futures month but rather a spread with the most recent PRO (average price during the pooling period). A way to simplify would be to move to shorter pooling periods and use actual sales to lock in futures basis (eg. spreads used by domestic millers in the domestic human consumption pricing). The objective would be to make fixed price contract spreads more consistent with actual market spreads used by the CWB sales department.

BennyHin had some comments when I brought up the issue of continuing to use initial payment spreads for grade and protein. Similar issues are involved here.

[sawfly]

Thanks excellent response , now at least i have a clue.

[charliep]

No one else steps in but I will note my shared frustration with current spreads. I think that spreads (class, grade and protein) are more likely to return to more normal levels after the tight ones in the current crop year. To me this should provide a more normal $15 to $20/tonne over for 1CWRS 13.5 versus the current offering of $5 to $6 over. To me this speaks to more CWB clarity as to how the numbers are arrived at and the ability to adjust as market conditions warrant versus simply adjusting around PRO releases dates. That would put prices about $10/tonne above the March PRO - similar to the premium over converted futures in the February PRO.

Barley even makes me crazier. A $27/tonne cost to manage risk in a malt barley fpc. The ability to lock in a basis which is $30/tonne lower than the open market would offer by delivering against futures in the Saskatoon catchment area.

[timm]

why not just sell mge wheat and then deliver into daily price contract.will current spreads be maintained.dpc at 237 today.

[charliep]

The one factor you will have to watch is the loonie. I suspect the loonie is headed towards 90 cents which will hold back any fpc gains. Margin calls can also be a cash issue if the market takes off higher this summer.

You can do a swap with on the fixed price contract ( trade your futures position for fpc with the loonie locked on the day you do the transfer) but not sure on a dpc.

[sawfly]

was i mistaken in thinking that by priceing alone that i had locked in the dollar?

Are you saying that if the dollar goes up my basis will get worse?
on this im not clear.

[charliep]

If you do a CWB Basis Price Contract on futures only, you have locked the loonie in. I was thinking hedging directly at Minneapolis.

Not sure myself on how the changing currency will impact basis. Again, the CWB basis needs to be more of a market signal and not just a random adjustment relative to the PRO.