The CWB Pool Pricing line... LONG or SHORT MGE

[TOM4CWB]

Dear Charlie,

As I understand it... the CWB 'pool pricing line' is the primary motivator of when the CWB actually sells the grain that goes through the CWB Wheat Pool... which includes all PPO contracted wheat.

I have had it explained to me... by a number of folks...

1.) 18 month sales period for the pool.

2.) Wheat Sales start slowly... and then pick up Fast as the past pool gets finished up. A 'bell curve'.

3.) There is a 'discretionary' pricing tolerance from the Pool pricing line exists for efficiency of trades and ability to refine the pool pricing line... if management decides there will be reason to be ahead or behind the pricing line.

I am told there is a 'discretionary' pricing tolerance of about 10% on each side of the pool pricing line.

On the 07-08 13mmt wheat pool... that means there could be sales 1.3mmt ahead of the pricing line... to 1.3mmt behind.

4.) If by some fatal decision... on Jan 15/08... the wheat pool was 10% ahead of the pool pricing line... and management decided to go to 10% behind the pool pricing line;

CWB Risk managers would be going LONG to buy back wheat on the MGE...(to readjust the % sold on the pricing line) driving the price UP... not going short and driving the price down.


I don't think the CWB will sue anyone for not understanding what they did... or they would have to reveal exactly what they did do....

What do you folks think... make any sense?

[charliep]

Good questions.

In a normal hedge, the CWB would buy cash grain from a farmer
(effectively long cash) and would sell futures to offset the risk
(short futures). The actual transaction would match the delivery
month on both the cash and futures side. Money made on the
cash side (farmers mostly sold for less that $7/bu - a benefit to
the pricing pools in that they are supplying inventory for the
CWB sales program at low prices) would be offset by losses on
the futures side.

There would be basis risk but the CWB highlighted that basis
provided a contribution.

What makes the CWB different that the above is they manage
risk not against individual delivery periods but rather across a
whole pooling period either via their discretionary trading in the
overall pooling accounts or the overall risk management
program in the case of the producer payment options. The risk
exposure then is moving positions between futures months and
from there spreads between these months. An example this past
year might have been being short March 2008 MGE futures in a
market that is rallying like crazy and trying to roll the hedge into
May/July by buying March futures at a painfully high level (lots
of margin money) and sell the deferred months that have not
rallies as much (CWB risk management strategy eats the spread).

I encourage all to review page 61 of the annual report. Will note
the full value of PPO sales was deposited into the overall pools
including damages ($1.65 mln). The questions around the net
hedge account activity.

[charliep]

Re-read your question and actually can't answer. That would be
an internal decision. Going long in market that is in a
squeeze/people prepared to stand for delivery could best be
described as foolish and at worst as suicidal. I would call a
speculative position - something the CWB shouldn't be involved in.
They should stick to selling grain and if they want to be really
innovative, do things like more pricing pricing pools, multiple
pools within crop years, programs like malt barley cash plus where
risk is managed against actual cash sales (not futures). Reminds
me of the number of farmers that phone me for advice on futures
replacement strategies - they generally buy the highs.

[TOM4CWB]

Dear Charlie,

The 'grain buyer' of pooled is also a big factor in positions held.

If a buyer wants wheat... and wants to price other than cash today... lets say order the wheat now and take delivery in three months... I understand the CWB does basis contracts and schedules the sale in the period 3 months ahead.

In February of 2008 at grain world... the millers were busy booking wheat... you can be assured they were not buying at $25/bu plus $4-6/bu basis ($30/bu)... they were deferring purchases... and locking up supplies at much lower values.

I understand the pool takes on this risk as well...

Further...

There is a big question if the government pool guarantee covers margin calls on hedges. It has been identified that the contingency fund is not covered... so I strongly doubt the hedge margin positions... put on for grain buyers and growers... qualifies either.

COULD the CWB go bankrupt?

[TOM4CWB]

Charlie,

Perhaps this highlights the restrictive nature of the CWB Act... and why it has been so painful to create options... when everything in the minds of CWB management... must be pooled in the final analysis to retain the CWB low cost working capital.

Running cash prices through the pools... is a recipe for disaster.

[charliep]

Will let others answer your question.

A normal business would match farmer deliveries/contracts
against sales to customers. Only if this relationship was out
of line would they use futures and only as a short term
solution. If you make some of your assumptions are true, the
CWB would be long term holders of positions - something
like the hedge funds that have created interesting problems
in futures markets.

A grain company would manage their risk position relative to
all the products and services they offer. They would have
sold a certain volume of crop to customers. They would have
a known volume of farmer contracts/commitments (in the
case of the CWB, PPO actually priced and basis contracts).
From the CWB, they would also know the volume of grain
they would like to have sold at that time based on their board
of director approved sales pace/actual sales plan.

[charliep]

I am leaving your question alone about the discretionary trading and the
impact on government guarantees. If PPO programs should be separate
from the pooling accounts and carry a contingency/be responsible for
losses, perhaps discretionary trading/programs that take on risk to
provide opportunity for the best average price should handled the same
way with the CWB taking the loss and not the tax payer.

[TOM4CWB]

Charlie,

Has anyone wondered... why the CWB... is working on a program to get rid of the gov. guarantee?