Charlie and others, SPE and RIC thoughts

[Ooofty]

Just have to ask again, what is your opinion on the SPE and RIC options for durum and spring wheat in Alberta.Thank You!!!

[TOM4CWB]

Oofty,

I have been thinking about the same issues.

One key question we MUST ask ourselves is this:

Where do you expect the CDN$ to be to USD$ next year at this time... and on Oct 30/07 for RIC/SPE?

If it is going quick... buying CDN$/USD$ calls will pay much more than SPE/RIC... but the overall package is better covered by SPE/RIC.

Further...If the CDN$ is at PAR by fall... the RIC/SPE might not be a bad investment... for the top half of the crop we expect to produce. FPC DDC and priced production contracts can be then used for the first 50% of expected production.

If your farm is anything like ours... 70% coverage is about 50% of expected yield on an average.

The further up side of Crop Insurance is that increasing prices in a drought disaster can be covered by the crop insurance offset that will cover the increased hedge cost... on the first 50% of production... if we grow a 20% crop on a wide scale. This is not a SPE RIC specific issue... but a risk management topic that should be looked at for agressive marketers who hedge 50% of expected production beforehand.

Hope this helps a little!

[charliep]

Would use SPE and RI on durum. The PRO on 2CWAD 11.5 ($175/tonne with a $45 basis) is pretty much equal to the RI price ($177/tonne). The discount (should call premium cost) for a durum FPC is $26/tonne (not a good deal) so the AFSC price programs are a more effective pricing tool (also not locked into a delivery so grade risk not a factor - you simply get paid based on October price calculation).


Spring wheat is more a decision requiring some pencil work/reviewing relative to your marketing plan. Will start by noting the calculations are based on a historical fpc premium (1CWRS 13.5) of $20/tonne over MGE December futures versus the current $5. Using the $40 under basis in the AFSC fall calculation and an average December futures during the past month of $210, a fall calculation would be $170/tonne versus the current 2CWRS 11.5 PRO of $155/tonne (assuming this was the situation in October).

Enough on the basis assumption differences. The route would go on 2CWRS 11.5 to figure out where futures need to be to pay out. Basis is $40/tonne under the converted December MGE price. Assume the loonie stays at about 90 cents versus the US buck. To get a payout under Revenue Insurance (realizing only pays out 50 % and not including the SPE premium), Dec MGE wheat futures would have to drop below US $4.65/bu. To get a payment under SPE (including the 10 % trigger, Dec MGE futures would have to drop below US $4.30/bu.

My thoughts are to use pricing opportunities to lock in good prices during the spring/summer versus spending money on the SPE. If your marketing plan is to do nothing until fall, I would consider the AFSC programs.

Caveat is to wait until after Tuesday when Statscan numbers are out. On wheat, would also leave as long as possible to get the best assessment possible on US winter wheat crop damage.

[charliep]

Should note all comments are relative to the average futures prices during the month of October.

Tom4cwb comments are also relavent both with the loonie and other futures/options strategies.

You can compare the cost of SPE to options strategies as well. Buy MGE puts on rallies. If you have priced already (not suggesting you become a Texas hedger - long crop and calls), buy calls on dips. If you want a lottery ticket on US weather this summer, buy corn calls on dips.