DPC 06/07 Wheat Rollover

[crusher]

Just read the release on the new DPC. I see they want to take an additional $5 fee for "basis" risk, surprise surprise. I didn't see any mention of not being able to put this year's crop toward new crop DPC. Anybody else read the news differently?

[charliep]

Press release below (fuller version on CWB web site). Will note now 650,000 tonnes (not enough). Interesting the new $5/tonne of tockage and the CWB inability to see anything beyond the pooling system and their ability to manage PPO risks relative to it. A first step for a CWB in a new world would be to develop new and creative cash marketing tools but unwilling to go there.

Changes to the 2007-08 DPC program
As part of its ongoing commitment to provide farmers with better tools to manage their businesses, the CWB has expanded the Daily Price Contract (DPC) program for the 2007-08 crop year.

The CWB is increasing the program’s tonnage limit to 650 000 from the 500 000 tonne limit in 2006-07. To help ensure as many farmers as possible have access to the program, a per-farm limit of 5 000 tonnes is also being introduced.

Interested farmers can sign-up a DPC for the 2007-08 crop year starting from June 18, 2007 to July 20, 2007. As was the case in previous years, sign-up is on a first come, first served basis. Once the program tonnage limit of 650 000 tonnes is reached, sign-up will be terminated without any prior notice. Sign-up will start at 9:00 a.m. on June 18.

The DPC is designed to provide farmers with additional price flexibility and to increase their ability to manage cash flow. U.S. elevator bids and market price relationships are used to establish daily cash prices for each class, grade and protein level of wheat. The program is one of the range of Producer Payment Options (PPOs) the CWB now offers producers, and like all other PPOs, the DPC is guided by the principle that it must be consistent with the maintenance of a competitive and viable pooling option.

The price risk associated with higher futures movement on any give day can be offset by the CWB hedging program. The CWB sells futures when the farmer locks in the DPC reference grade value and buys futures against the tonnage in the program according to the CWB sales pace. Compared to other PPOs the CWB offers, there is considerably more unhedgeable basis risk for the DPC. One source of this additional risk is the use of a single market – the northern tier of country elevators in the United States – to determine DPC pricing, when sales are made against a number of other market price structures with varying basis levels.

There are currently no effective risk management tools available for the types of basis risk inherent to the DPC. At the time the DPC was structured, it was hoped that the Minneapolis wheat index futures would provide a mechanism to hedge a portion of the basis, however, they only trade sporadically, and have not provided an effective risk management tool. Without a reliable method to manage basis risk, the CWB needs to increase the adjustment for risk to deal with a higher-than-expected basis risk associated with the DPC program.

The CWB intends to increase the risk discount by approximately $5 per tonne from the current 2006-07 program levels to offset the higher level of basis risk, which means the daily prices offered in 2007-08 may be lower than historical comparison may suggest. However, the changes to the way daily prices are established will improve the long-term viability of the DPC program.

As part of the DPC operating guidelines, the CWB is also committed to keeping the spread between the DPC and the Producer Direct Sale (PDS) relatively narrow and stable with the proviso that under exceptional circumstances, the spread could be widened to protect grain that was required for the CWB marketing. This provision has never been exercised. The linkage between the PDS and the DPC provides farmers with the assurance that both the DPC and PDS will track the average price to cross border elevator prices for grain of similar quality. If the DPC price is low relative to an elevator across the border, then selling to the U.S. using the PDS should be attractive. Conversely, if the PDS is high relative to the cross border prices, then the DPC is also likely to be high.



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[btjadenlepp]

i don't see anything about not being able to roll old-crop over, anyone else?

[charliep]

Not clear from the press release but in talking to a farm business rep, the daily price contract can still be used to price old crop deliveries.

Farmers will have to do their homework on this decision. The 06/07 DPC on Friday (1CWRS 13.5) was $230/tonne port (note - this number will be $5/tonne lower for risk/tockage on August 1). The 06/07 PRO is $219/tonne or $216.75 if you use the 100 % EPO (EPO cost $2.25). The 07/08 PRO is $210/tonne. From there, you have to include the grade spread differences between the pooled prices and the US. Finally, you have to second guess market movements over the next 60 days.

Would use the next 2 weeks to watch things but my comment today is pricing old crop/using 100 % EPO is the way to go. Spend mony on calls if you have to hold a speculative position into the fall. You will have also managed currency risk if you do this.

[charliep]

Likely boring to everyone else but the comment about basis risk is interesting to me. Had to look at the 2005/06 annual report for guidance. Results of the DPC are mentioned on page 54 - 73,904 tonnes contracted with a loss of $900,000. There is no separate accounting process for the DPC (included with the fixed and basis contracts on p. 67).

2006/07 results (not available for another 8 months with the publication of the annual report). I will be very curious as to how the CWB backs today's actions up with the actual results/accounting for the current crop year (2006/07). Will make for some good reading.

But on the other, everyone just accepted the basis adjustment on the FPC last fall without complaining. Why would this be different?