Cash or Pro?

[rodbradshaw]

Charlie I see an article where you say to take the cash and run. Most of my
CSR's are trying to say that the premium is to high, stay in the pool. It is hard to believe that there is $6 something in the Pro for 2CPS and yet the initial is only $3 and change. Is the CWB fudging on the Pro to get us poor farmers to deliver our Wheat or is it too hard to ask the government to guarantee a higher initial. The initial is usually about 75% but in my poor math skills it works out to about 50%.
(All figures are net deductions).
I could use a little help here as I hate to break down and apply for that magic marketing book after so many years.

[TOM4CWB]

Rod;

Risk management has risk...

1. Will the risk created by refusing to make a decision mean you could end up loosing money on your CPS acres?

2. Will the return offered by accepting this risk management offer create a healthy profit on these acres?

3. What is the Alternative, do you see marketing choice comming soon, lower wheat prices as production tends to ramp up... decisions decisions

Rod, we should be thankful we have a decision to make... many have nothing to sell... that is what really hurts our communities and families...

ALL the best in predicting the future... you can see why the "single desk" Pool is an easy way to hide one's head in the sand... and not be responsible for having to make a difficult decision today...

It does have a deceptive attraction... spreading our risk over our neighbours farm and community, whether they like it or not!

[charliep]

Hi Rod

Before I comment, I have to clip and paste a couple of sentences out of an editorial article Ian McCreary (one of Saskatchwan CWB directors). The context is the changes that have occurred in overall CWB operations/marketing alternatives being offered farmers. The we here refers to the board of directors.

"We have looked at taking over guarantees on initials and final payments so that we do not have to wait for government bureaucracy. We decided that this is not in farmer interest due to the costs of the risks."

Source: http://www.cwb.ca/en/news/letters/103102.jsp

Your question.

Alberta non board wheat price (I assume less than 14.5 % moisture/56 lb./bu plus) - $4.90/bu (elevator bid) to $5.50/bu (feed mill bid with some hunting). Likely to hold unless corn drops much more.

Alberta 2CPS pool return outlook - $6.25/bu ($6.38 from Oct PRO minus 13 cents discount for 2). At least some risk this will prove to be optmistic. Level of competition from non traditional exporters/EU, winter wheat condition for 2003 northern hemisphere crops (currently bigger acres in US/Ont and excellent condition) and timing of sales (keeping in mind US winter wheat harvest is in June and Canada sells the the last 4 months of the pooling year in competition with this crop) are critical. I'm not negative on wheat outlook but there are some challenges ahead to higher prices (noting prices have come back a lot over the past month).

CWB early pricing option for CPS - the early pricing option (using 1CPS Friday) would have been 251.10 (port based) or 90 % of the Oct. PRO. The discount (Friday) is $20.25/t. As a comment, this seems expensive for a 10 % out of the money put (keeping in mind it is based on a PRO from 2 weeks ago) and is an indicator that PRO forecasts have potential to come down. The end result is a $4.90/bu initial payment at delivery plus any adjustment/final payments above the 90 % initial payment.

So what does this mean for strategy? Cash flow needs are critical in this decision. Putting a normal cash flow flow requirement into the thinking, I would look for a balance in my wheat marketing plan of sales for cash, deliveries to the CWB pool and stored grain (assuming dry). Cash sales to me would feed mill if I could get over $5.25/bu. If not, use the CWB early pricing option (holding my nose over the high discount - sometimes you have to do what you have to do). The blend will be an individual decision depending on what is going on financially with that business.

[rodbradshaw]

Tom
We are lucky that we have something to worry about as many do not have to make those hard decisions. I guess the hard thing is to find enough information so one makes an informed decision. With so little information be disseminated on what happens in Canadian wheat sales it would be easier to sell anything else and feel good about the decision. Bring on market choice and then at least I will be responsible for my decisions,right or wrong, but when I feel like I am sticking my hand in a bag and drawing out a number,I wonder if this is the best game to play.

Charlie, thanks for the info, I guess I should have referenced the question in a little better and proper terminolgy,but you answered it inspite of the poorly worded question. I meant the EPO as opposed to the true cash market.
Thanks

Rod

[charliep]

You ask a good question that I don't have an answer for. Prairie spring wheat is always a weird one in that it is mainly bred as noodle wheat and meant to be sold in competition with Australian Standard Wheat. To date, it has not met the Aussies quality standards (some of the new varieties are better).

Leaving out all the issues of averaging prices over the pooling year, would CPS prices be better or poorer? Don't know. Farmers price/quality signals get muddled up in the pooling process depending on spreads applied with to hard red spring wheat.

My guess is an open market would do a better of segregating quality (maybe to the level of identity preserving at variety level) to compete with some varieties only market being domestic feed. The result would be a CPS market that is more responsive to customer needs. Farmers could evaluate these varieties based on price relationship with other classes and their ability to hit the customer specifications and make better decisions. Today, these signals are all mixed up in the pooling process (depends on how much faith you have in the way class/grade/protein spreads are assigned).

[charliep]

Rod - When you say true cash market, do you mean feed or potential export price (if you had market access)?

Interesting to look at the discounts for the early pricing option (EPO) as the market took a dive today. The current discount is $26/t.

http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/epo/111202-khrw.html

An interesting excercise is to compare the current market based on the calculation used in the producer pricing options for prairie spring (converted KCBT Dec. futures) to the 90 % EPO.

The converted KCBT Dec. futures today was $233.81/t. Basis used in the producer pricing options has varied arywhere from $3/t over to $19/t under. The EPO value is $251.10/t (full PRO $279/t).

I'm racking my brains trying to come up with a strategy based on the following:

1) I want my money. Not willing to take a 50 % initial payment/wait for the rest.

2) The price of the CWB EPO premium is high (70 cents/bu). I hate to spend that much on price insurance/to maintain opportunity.

3) Is there an options strategy that would finance some of the cost of the above? Could a person sell an out of the money KCBT put with the idea the worst that could happen is that they would would end up long futures (prices drop to the point where the contract gets excercised on) at values slighly lower (depending on strike price) than the market today?

Ranting of a mad man. Any others that have thoughts/potential strategies?