Hedging wheat..

[TOM4CWB]

Melvill...

I am interested in hedging wheat for next fall(03)... NOW HOW DO I DO THIS...

I have a significant acerage planted to Osprey CWRW certified seed...I understand this qualifies for a milling specialty contract...

Now... how do I cover off the $50-70/t basis risk the CWB is extracting from us... and why hasn't a fall 2003 price been avaliable... the highest prices in history have come and gone... and the CWB prevented anyone from even attempting a profitable hedge... is this fair?

CPS is in the same problem as winter wheat...

CWRS isn't much better...

So now Lee... what is your marketing idea that doesn't kill me if we have a dry year in 03?

[winston]

The CWB fixed price and baisis contracts might be available by the end of Feb this year (if that is any help to you)

I looked at last years #'s and there were times that we could have hedged a very attractive price for CPS and Winter Wheat. You could have been at least a $1.50 per bushel ahead of the current PRO if your timing was perfect.

[TOM4CWB]

Winston;

Obviously Hindsight is 20 20... and since the CWB would not allow anyone to straight contract the high prices, you were talking about, when they actually occured, the PPO's weren't much different than buying a lotto ticket!

Risk management is my objective... to create a profitable base for my farm and family...

The obvious issue is that you are comparing the PPO price to the Pool, and the fact remains that 50-60 dollars/t extra basis were taken from the PPO contract farmer, by the CWB... in the case you identified. WHY?

How do we hedge wheat when the CWB takes such a huge basis... and expects us to commit before production it even exists...

On my Canola, I signed basis contracts about now for the fall of 02, and worked through the production disaster problem with reasonable people, at a fair cost, $0/t

The CWB promises to treat us fairly, yet the CWB is the worst bunch on this planet to work through these problems.

The CWB contract is not worth the paper it is written on, because the CWB Monopoly does not allow transparent trading of our wheat... especially after August 1st... therefore a fair competitive basis to buy out our contract cannot be established...

If I challenge the fairness of the CWB buy-out, The CWB wrote in the contract I must pay the CWB all it's costs associated with working out a fair buy-out of the PPO contract... no mediators allowed, the CWB is the judge and jury.

Look at your example for CPS...

If you signed a CPS basis PPO on July 30th, 2002, and didn't price the contract, the CWB is asking for $50-60/t cash to buy out of this basis contract!

How can stealing such a huge percentage of our wheat value (30%), be considered justifiable, reasonable, and "a genuine pre-estimate" of actual CWB costs?

When I sign a CWB contract, the risk I create for my farm is totally absurd compared to the risk of signing a basis contract on Canola for instance.

The CWB Basis contract will not even allow a Fair Market Value for lower quality feed wheat, if this unfortunate circumstance comes to pass.

For the CWB to call the PPO's "Marketing Choice", is insulting, isn't it?

[melvill]

tom, you said you are interested in hedging wheat for '03 delivery.

Remember this formula for commodities that use futures markets for price discovery:

Cash Price = futures minus -or plus- basis.

In other words there are two factors that influence the final price that a producer receives for his product - futures and basis.

What do you mean by hedging? I'm sure you know that the actual meaning of hedging is to use futures contracts to reduce but not totally remove price risk. For a grower of a product, that means selling futures at a price that, when adjusted for an expected basis, gives an expected price that the grower likes. Hedging (using futures) doesn't cover possible basis changes - basis risk. Covering basis risk requires a separate transaction.

If, to you, hedging means locking in a final cash price, that's a different matter entirely. Canola producers can lock in a final cash price by signing a DDC with graincos or crushers. Western Canadian producers have been able to "hedge" what by signing a Fixed Price Contract with the CWB which locks in a final cash price.

Western Canadian HR spring wheat growers can hedge some their wheat crop price risk by selling Minneapolis hard wheat futures. Minne wheat futures are in US dollars so a complete hedge would include covering the Cdn dollar exchange rate, too. There is, however, no good way to cover basis risk for Canadian HR spring wheat like there is for feed barley or Canadian canola. However, it might be argued that covering futures risk with Minne wheat and Cdn dollar exchange is a heck of a lot better than doing nothing at all which, by the way, is what an awful lot of producers to.

Charlie says that typically CWRS PROs are $20 to $25/tonne over Minne futures converted to Canadian dollars. So we have roughly a $20 to $25 over basis.

The other risk you mentioned about hedging -using futures- is that with a futures hedge there still could be a problem if futures go up and you have no production. If you have production and futures goes up, generally the cost of closing out the futures will be offset by the increase in value of your wheat. If, however, futures go up and you have no production, there will be a cash flow problem.

Remember though, nobody gets something for nothing. A true hedge gives price risk protection but there still is the chance that the hedger would have no crop to deliver.

A Canadian producer, who knew how to and who wanted to, could have sold Sep 03 Minne futures -as a hedge for 03 crop- in mid October in the $4.05US to $4.10US range. That would have taken care of price risk for some of the '03 crop. With a $20/t basis and a .64 Canuck buck, that $4.05 equates to about $6.85/bu.

I wonder how many people did that even if they knew how. Darn few I bet.

The other alternatives is to use Minne wheat put options. Put options are basically insurance against falling prices but any insurance costs money. Put options provide decent protection for downside but the buyer is only out option premium if prices go up and there's a local crop failure. Trouble is, back in November, Sep 03 Minne options weren't being traded.

So we still come back to Minne futures . . . and darn few producers seem to want to use futures.

Tom, I hate to say it but you're right. There is no decent way to cover off CWB basis but we still can cover futures and currency risk.

[TOM4CWB]

Lee;

Thanks for taking a run at it!

The real benefit of the CWB, if the CWB so chose... would be to offer reasonable basis contracts... that even could have more flex and less risk... in case of production problems than say Canola. Since the CWB has such a huge area it pulls from, and since the CWB could average a production number over the whole area... it is certainly possible to provide a reasonably priced basis contract with an opt out clause if the weather goes against the farmer.

I am afraid that this will never happen as long as the CWB exists as it operates today.

If CanAmera can offer me $10/bu on a Canola contract... for all I grow, then the CWB can certainly do better than what they are doing today.

As far as I can see it... the CWB is taking an extra $30-40/t, on PPO Basis and flat pricing contracts... just so they can undercut anyone on the planet... any day of the week...

Is there any wonder we are being brought before the WTO?

[melvill]

Tom, what are you doin' pecking away at a computer on a nice afternoon like this?

Basically what you'd like is a basis contract with an "Act of God" clause in it, right? Graincos and crushers don't usually offer canola basis contracts with that kind of clause because they offer producers a basis contract as a way to capture or guarantee supply. Guaranteed supply is what they're looking for. A basis contract means that they can sell that seed - or the oil and meal from that seed - to one of their customers before it's in their facility. If the producer can't deliver, the grainco or crusher has to find replacement supplies to meet their customer obligations and there is a cost to that.

I guess what I'm saying is that a grainco or crusher or CWB that was offering a basis contract with an Act of God clause would rightfully be offering a weaker basis - maybe much weaker - for that kind of contract as compared to a basis contract without an "escape" clause.

I don't diagree with you that CWB basis contracts, over the past years, could or should have been better designed. However, who should cover the costs of a basis contract that the producer can't or won't deliver on - the producer or the CWB through the pools?

[TOM4CWB]

Lee,

Very simple point,

I do not mind paying the actual cost to a marketer to replace my grain, if I do not supply.

In every case this year on my Canola, If I had not priced my basis contract, the marketer charged me the basis that prevailed at the time I asked to cancel the Basis contract. NO PROBLEMS WITH THIS AT ALL.

When the CWB looses money on every tonne I supply now, because of falling prices since November 02, yet the CWB is trying to extract an additional $30-40/t on top of the futures profit the CWB has gained from my hedge...

There has to be something drastically wrong with this CWB contract.

THe CWB wants it both ways... to link my contract to the futures to set a price, but refuse to account for futures moves down if I want out of the contract... linking my contract to the PRO, when the PRO half way through the year has nothing to do with the futures at that point in time. Half way through the pool year, the PRO is a accumulated pool number with only a small movement possible up or down, weighted by a smaller and smaller unsold contribution to the pool number, until the pool is finished at the end of the crop year.

If the CWB wants to stop cherry picking fine. The CWB must then have A, B, and C series contracts on seperate pools.

Otherwise nothing in this system respects those who commit early to CWB sales in the year, and certainly those who signed up a B series contract at the end of January took great advantage of us who committed to the CWB is August or September of 2002.

Lee I am not asking for special privilege, I am just asking the CWB to be fair, and respect farmer's property, and respect the right to enjoyment of our hard earned property.

Lee, you know the CWB has my undivided attention, and so I must work on resolving these issues... I have an obligation to fight the CWB into life... cause the way they have treated many wheat growers... has been sad to say the least!

Thanks for helping draw out the real issues... you have helped!