Need help with fixed price contract on #3 cwrs wheat

[poorboy]

My wheat is grading a #3 13.5 protein this year and am trying to figure out the pricing on it using the FPC. It looks to me that if I take the FPC on #3 wheat and deliver and price today I could get a certain number of dollars in my pocket, but if the spreads on wheat widen between grades I could end up with less money on future deliveries.

For example today the spreads on initial payments between the reference grade #1 13.5 protein wheat and #3 13.5 protein wheat is approximately $17/tonne. So if I locked in a FPC of say $200/t and elevator deductions were $45/t and I sold #3 13.5 wheat, and the spread between the grades is $17/t I would get ($200-45-17=138/t).

However it looks to me that there will be a premium for top grades this year and the cwb will probably raise its payments for 1and2's but not 3 grades. So if for example the cwb raises the price of #1 13.5 protein by $50/t and leaves the rest alone, it would make the spread between the reference #1 13.5 and my delivered grade #3 13.5 amount to $67/t. So using the above price example I would net in my pocket ($200-45-67=$88/t). In this example any grain sold after the initials increase for #1 wheat has the effect of decreasing the value of my FPC on #3 wheat.

Am I understanding this correctly? The CWB rep claims I am getting the correct picture.

What happens if a producer takes a FPC on all of their #3 wheat and then the cwb only has contract acceptance of less than the full amount? Do you get to deliver 100% or get cut back on your FPC?

I think that the current spread of $17 between a #1 and #3 wheat is not bad and would like to somehow lock that in but am seeing no way to do it?

[TOM4CWB]

Poorboy;

3 options exist to insure delivery.

1. Seed overdelivery allows immediate delivery.

2. Mill call by a processor if accepted can get instant delivery and settlement.

3. Sign up more than have; knowing that the liquidation charge will accrue if you can't find more grain to fill your contract... IF you have a easy agent of the CWB with a good relationship to do this.

Simply speculate what the acceptance on the "A" series will be... and sign it up.

Not much risk for those overcommitting... if you have a pleasant relationship with the CWB.

If you are an enemy of the CWB watch out.

They could prevent the needed (grain that was not grown on your farm) for delivery to fill the unfilled contract and nail you with big damages.

[melvill]

I'll put in my 2 cents worth paragraph by paragraph.

Yes, with FPC, you have risk that if the spreads in initial payments widen later in the year, you could take home less if delivering #3. That won't happen, though, until the initial payments are adjusted. However, it depends on how the CWB handles the spreads. If it raises the initials (and PROs) on high grades & proteins and leaves the #3s initial alone you are okay in terms of take-home pay.

What happens to #3 wheat committed on a FPC? The provisions of a FPC or a basis contract guarantee that all the grain will be taken by the end of the crop year.

As for protecting the spread throughout the entire crop year, the more I think about it the more I'm not certain it can be done. Even using a 100% EPO has the potential not to protect the spread, especially if returns are higher than the EPO price by the end of the year when spreads in final payments could kick in.

[poorboy]

If I understood it right and took a FPC, and the board raised the spreads between a 1 and 3 wheat, my take home pay would drop on all wheat priced after the spreads were increased. The board only sends a top up to you raising the payments from a #1 13.5 protein to bring that value up to you FPC. This payment could narrow if the spreads widen out and have the effect of reducing the take home pay.
In looking back at last years cwb payments it is not unusual for for the adjustment payments to be different for each grade and protein. A $20/t increase in adjustment payment for #1 13.5 protein and no adjustment payment for #3 wheats would have the effect of reducing the pay in my pocket by $20/t using a FPC
Any ideas if the epo on #3 pools has any decent levels of protecting where the price of #3 wheat is at today as compared to the pool price?

[melvill]

Sorry to take so long to get back to you. No one else added anything 'cause they're all trying to combine or catch up on sleep, except maybe tom4cwb who tends not to sleep at any time.

I hope I understand your question correctly. The spread between grades and proteins is set by the initial payment spreads in effect at the time of delivery. Let's say you took out a FPC on CWRS wheat at today's value of $201.65. Today, the initial for that is
$133.60/t. If you delivered #1 CWRS 13.5% today on the FPC, you'd receive the initial of $133.50/t less local deductions) and a top-up payment of ($201.65 - $133.60) $68.05. If you delivered #3 CWRS 13.5% today the initial is $116.00/t and you'd still get the same top up of $68.05 but your total would be $184.05 because the initial is lower. That spread is $17.60/t.

Later in the year let's say that the #1-#3 spread widens because the PRO and initial payment for #1 goes up $10/t but #3 stays the same.

Under that situation, let's look at delivery against a FPC for $201.65. Deliverying #1 would give an initial of $143.60 and a top-up payment of ($201.65 - $143.60) $58.05 for a total of $201.65. Deliverying #3 would give an initial of $116 and a top-up payment still at $58.76 for a total of $174.76. The spread is $26.89/t.

So you’re right. An adjustment payment for #1 13.5% with no adjustment or a smaller adjustment for #3 would reduce your take-home pay.

As for the EPO, it protects you on the spreads on the day you deliver. It doesn’t protect you against unfavorable spread changes in the final pool return unless the EPO value you select is higher than the actual total pool return at the end of the year. I think that’s unlikely unless you were to choose the EPO at the 100% level.