Income Assurance Program (draft proposal)

[noelm]

The sabbatical idea is interesting, but I suspect has more potential as a political statement than an economic strategy. Canada is one of the larger exporting nations (although it does not rank as high now as it did 30 years ago), but compared to many other countries is not a large producer (USA, Russia, Ukraine, France, Argentina, Brazil, Australia, India all produce more grain than Canada). So the sabbatical is in some ways a local action that is attempting to influence world prices. A bumper crop in one or more other large producing countries could easily make up for the lack of production in western Canada, and keep grain prices low. Buying futures is a high-risk game, but perhaps no higher risk than planting a crop! As more people sign up for the sabbatical, I think it is critical to keep media folks informed, and maybe create some awareness and sympathy among urbanites (who have their own survival struggles to deal with). This might eventually get through to politicians. What are the other ways to use the land that is not being cropped to bring in different sources of income if you choose the sabbatical?

[twoklive]

MY OPINION ONLY and this is before I attend the meeting scheduled for Feb 5th. I am forming this opinion based on discussions with other producers and opinions read here and elsewhere. I will modify this after the Feb 5th meeting if necessary to do so.


If 8 billion bushels of grain production was removed from the system, and the farm group was to attempt to make the difference up in futures contracts, the idea would fail. And here is why:

Futures open interest as of Jan 31/01 for 8 forward months of all grains and oilseeds was 887,261. This equates to approximately 4.5 billion bushels.

8 billion bushels as the group suggests equals 1.6 million in open interest or a 360% increase.

For a farmer to make 100.00 per acre at an average yield of 30 bu per acre, that equals 30,000 bu for a 1000 acre farm. Each U.S. futures contract is 5000bu so this is equal to 6 contracts. 100,000 dollars divided by 6 contracts equals 16700.00 dollars per contract.
1.6 million contracts times 16700.00 dollars per contract equals 26.7 billion dollars.

Who would be on the short side of these contracts? Speculators, commodity fund managers, and hedgers. The hedgers are basically farmers, and if this plan was put into effect, they would no longer be there. That leaves the speculators. When these people see the large demand for long positions, buy bids start coming in, a few thousand contracts might be sold. Demand for long positions increase, the Speculators start to back off. Bids go up as demand increases, but there are no trades because the Speculators are not writing calls. Hence no trades.

Speculators are not stupid. They do this for a living each and every day. They will want to be long also. Nobody is going to be hung out to dry to the tune of 26.7 billion dollars.

The theory is good, the reality is it will not possibly work. Please if you trade futures for hedging, ask your broker, if you know someone who does, put the theory to them, give them some numbers to think about, and see what an informed futures trader thinks of the sabbaticals plan.

Just my opinion, it is up to you to be informed about the whole process.

Thanks for your time.

Comments to kostrosb@cadvision.com
Brian Kostrosky