Initial Payment Spreads Versus the PRO

[charliep]

Just curious if anyone has looked at initial payment spreads versus the PRO. As an example, the spread between a 1CWRS 13.5 and 2CWRS 11.5 is about $20/tonne. The spread on the PRO is $52/tonne.

The incentive is to use an fixed price contract and early delivery (if possible) to lock in the current initial payment spread (you can put $10 to $30/tonne extra in your pocket). If the grade and protein spreads widen when initial payment are raised, you will loose this benefit. You can also use fixed price contracts on existing deliveries. That is, sign an fixed price contract for a 2/3 CWRS with lower protein and apply it against a delivery from last fall or earlier this winter.

Make sure you are comparing all the current old crop alternatives and working a pencil/calculator if contemplating storing into next August's open market. If you see the benefit, my next recommendation would be to make sure you lock in that benefit of carrying old crop forward with a open market deferred delivery contract.

Work the numbers.

[Hopperbin]

Ummmmm, what did you just say or ask?

[Hopperbin]

I sure hope open market is going to be better to understand. :-)

[stubblejumper]

Sign-up will be terminated Jan. 30 for the 80-per-cent Early Payment Value (EPV) under the CWB's Early Payment Option for Nos. 1 and 2 Canada Western Red Spring wheat and Canada Western Hard White Spring wheat, and for Nos. 1 and 2 durum. Sign-up will also be terminated Jan. 30 for the 80- and 90-per-cent EPVs for selected barley. Sign-up will remain open for the 90- or 100-per-cent EPVs for Nos. 1 and 2 CWRS and CWHWS and Nos. 1 and 2 durum, and for the 100-per-cent EPV for selected barley. More information is available at www.cwb.ca/ppo .

[Hopperbin]

Actually Stub that has nothing to do with Charlie's origional post. Even though I don't know what Charlie just said.

[bucket]

Its like he's speaking "eskimo" !!!!!

[charliep]

It may be Eskimo but there is potentially a $800
benefit to learning the language on a "B" train even
acting today.

I can work through an example. Deliver 2CWRS
11.5 protein. Get an initial payment of $138/tonne.
Sign an FPC today. Difference between the FPC
1CWRS 13.5 and the initial payment 1CWRS 13.5 -
$80/tonne which gets mailed to you in a couple of
weeks. You pocket $218/tonne. The PRO today
2CWRS 11.5 is $198/tonne (elevator). Examples are
Alberta.

Fast forward to the day after the likely adjustment
payment. 1CWRS 13.5 wheat gets a $20/tonne
adjustment payment. 2CWRS 11.5 gets didly squat.
The benefit of the spread gone - no extra money.

[charliep]

On the other point (and perhaps to get you both
excited), make sure your decision to store wheat
and durum between crop years is a business one
based on more dollars in your pocket. Note you
commented that Greg is always a bear but you need
to look at the market fundamentals which highlight
slightly lower prices in 2012/13 unless weather
kicks in. I wouldn't carry wheat forward unless I
had signed a open market DDC/locked in a price.
My two bits.

My other comment is you had better start to
understand protein markets and spreads. This will
be the change in what you are used to from canola.