Marketing without the CWB

[chaffmeister]

FWIW - Steve was making a point about basis contracts and GPO's; I made the point about 90-day storage tickets.

Traditional basis contracts do not weigh on the market as you suggest. The market has not "captured the commodity" through these contracts. But maybe we're talking about two different things (which is what I suggested to Steve earlier). When I talk about a traditional basis contract I am talking about a contract where the grain has NOT been delivered into an elevator - and in fact, it MUST be priced before it is delivered to the elevator. If you and Steve are talking about a another kind of basis contract where a basis is agreed to, the grain is delivered AND IS PRICED SOMETIME LATER(after delivery), then that would be totally different. That contract would be the same as the 90-day storage ticket in terms of how the market can exploit it. ANY PROCESS, CONTRACT OR AGREEMENT WHERE GRAIN IS DELIVERED INTO THE SYSTEM WITHOUT A FINAL PRICE ATTACHED SHOULD BE AVOIDED AT ALL COSTS.

So, are we talking about two substantially different basis contracts?

[melvill]

kernel, I don't agree with you on the basis contract issue but I do agree with what you said when you said that 90-day "storage tickets" weigh on the market.

When a grainco or crusher takes in product on a 90-day ticket (most are now at 60 days) it hedges its upside price risk by buying futures for that product. Of course, that 60-day storage is most often used by producers as a way to deliver a product but still participate in or wait for any cash market rallies.

Usually in the fall during harvest, a significant amount of product, especially canola, is delivered into the system and put on these "storage tickets". While the seed is "in storage" its value can change by the basis changing or by the futures changing.

Interestingly enough, grainco staff tell me over and over again that most producers price out these "storage" tickets on the second or last day before they expire.

When a producer prices the grain, that triggers a significant amount of selling of that futures as the graincos sell their bought futures about 60 or 90 days after harvest. That selling is bound to move the market down.

In addition, basis levels later in the fall tend to be wider (weaker) than earlier when much of the seed was put in "storage".

The producer with a "storage ticket" is hit with a double whammy - declining futures and widening basis. I only advise my producers to use "storage tickets" either when they're critically shortage of storage or they've got a little bit of tough product that the buyer is willing to blend. Otherwise don't touch 'em!

[chaffmeister]

Lee:
You've added some good stuff to this point. The one thing I would say to clarify is that the grain companies are long futures against sales they made (not to hedge the unpriced 90-day contract). They just don't lift that hedge until the grain is priced.

[chaffmeister]

I agree with the 90 or 60 day storage ticket and would suggest that a low or "0" basis contract offered for say November furture delivery, If enought tonne is sign in on this contract it tends to weigh on the market.

For example I have watched both 90 day and low basis price in the fall, locked in on November price. Tend to lower prices untill all of contracts are captured. You can bet that the dec. 10 price is normally a lot higher trying to capture commodity after the Harvest fools market.

That why I lump 90 day or 60 day contracts in with the Basis contract because even though the commodity is not delivered it has been captured and must be delivered by a certain time in the future.

[chaffmeister]

Steve did you notice how we drew out the boys who make their living teaching or broking in the commodity to defend a system that was invented for buyers not sellers of a commodity.

Now for their system to work properly for the producer their should be a astock exchange for price of inputs at the farm level. Not a take it of leave it price that we have now for in and output.

My theory is if more farmers would ask for a price on their commodity (ex. GPO) instead of taking one like they do now it would tend to move prices higher or stead them.

But then their would be less teachers or brokers needed. Go ahead boys and defend your speculating and brokering jobs.

Sorry about that, I do learn alot from you boys on what not to do. But there is times you are not thinking like a producer when it comes to marketing.

[Steve]

Melvill & Chaffmeister.

Thanks for your comments.

My comments were made in general context related to personal experience and not pointed at any individual on this thread and not meant to be belligerent.

I know it’s not possible to forecast future grain prices and always be right, but if I pay for advice I expect value added and it better be more accurate than a weather forecast.

Today’s farmers can get free reports, by telephone, radios, TV news, computers – internet, access to local grain buyers price list, grain carryovers, world grain prices, grain and weather conditions worldwide at no extra cost. Most farmers are capable of analyzing the results and use marketing strategies to stay in business.

Farmers don’t have the time or need to sit at the marketing table everyday as suggested by some advisors and are successful in marketing their grain using the marketing system I suggested earlier on.

Chaffmeister-- You are wrong to put hired labour help in the same category as management, (adviser) and I best not say anymore.

Chaffmeister – you seem to be a little confused on the basis issue in our discussions so I will try and clarify my comments.

Basis are applied to every grain marketing transaction and it can be disclosed or included (it is simply the cost of handling and marketing).
I call a basis contract a bribe by the grain buyer, so the producer will commit to deliver grain in that month (at o basis that means he will handle and market your grain at a loss to him and no cost to you) “BS” do you really believe he can stay in business if he keeps operating at a loss. ( basis are hidden)

1GPO’s marketing (basis included in the asking price) no need to mention basis (price advantage for the producer).

2Basis contract locked in (grain stays un-priced until you order to sell) and the basis are applied to day price at time of sell order, grain delivered after sold (price advantage grain buyer)


390 or 60 day storage contract –un-priced grain (basis will be included in the offered day price) no control on basis, no need to mention (price advantage grain buyer) I don’t like to use.

4Sell to offered future price (basis included in price.) no need to mention basis (producer’s choice to sell-- day price)

That should be as clear as mud in the eye.

[chaffmeister]

To ***kernel:

1.I am not defending any system. I am trying to help you and others understand the futures system by adding my little two bits worth. (By the way, I don’t make my living “teaching or brokering”.)

2.The system was not “invented for buyers not sellers of a commodity”. Large end-users (buyers) would prefer NOT to have the price as visible as futures allows. For example, ADM has publicly stated that they do not support the CBOT and would avoid using it if they could afford to. (They can’t afford to because their competition would have lower costs (lower risk = lower cost) and therefore ADM would not be competitive. Not really the sign of a system “invented for buyers”. Other end users have told me – point blank – they would prefer the cloak of misinformation. Buyers are forced to use futures markets that are well functioning. Why do think it’s so hard to start new ones?

3.You talk about us “boys” not thinking like a producer when it comes to marketing. My concern is that you’re not thinking like a marketer when it comes to farming. I have been trying to tell you things that few (if any) have ever told farmers. But as long as you embrace this disdain for brokers and speculators you will always be slow to accept new stuff that you can really profit by. I’m not a broker trying to sell you something. I am an ex grain trader who is just trying to pass on what I know in the hopes some of you might benefit from it. Please accept it in the spirit it’s given.



To Steve:

1.Hired labour IS the same as any other resource you are using – fuel, seed, chemicals, advise, management services. They all need to provide a payback or else you stop using them.

2.Re basis – trust me, I’m not confused.

3.Basis is NOT simply the cost of handling and marketing. You made the comment “at 0 basis that means he will handle and market your grain at a loss to him and no cost to you”. This tells me you don’t understand basis as well as you’d like. Trust me, it DOES NOT mean he will handle and market your grain at a loss. The thought that basis is simply the cost of handling and marketing is old and was used when all futures contracts were for delivery in terminals – it was easy to explain. But even then it was not completely right. For example, in the old days when canola futures were based on delivery instore Vancouver, country basis levels were often around $40 under (or more). Anybody who thought the cost of handling and marketing was therefore $40 was dead wrong. When country basis levels were $40 under, canola was trading in Vancouver for about $15 under futures – the difference between the buying (at $40 under) and the selling (at $15 under) was about $25. This was closer to the reality of the cost of handling and marketing at the time.

4.A basis contract is not a “bribe”. It’s simply a means of negotiating terms with farmers who may not be willing to accept the flat price at the time. It’s the only part of the price that graincos can negotiate – the other part, futures, is a public price.

5.I don’t understand your “BS” comment that followed your comment about graincos handling grain for a loss.

6.Your comment that GPO’s are “(price advantage for the producer)”. As I’ve said before, GPO’s can (and will) be used by the grainco to its advantage. If you still don’t see this, then I apologize for not explaining it better. If you like them, that’s great. If they work for you, even better. But let me say this: graincos like them too (for the reasons I mentioned before).

7.Re: Basis contract, “price advantage grain buyer”. On the basis of what you’ve written before, I think you mean the grain buyer has the advantage over the seller on the pricing of these contracts. I don’t agree. The futures market determines if you get your pricing, not the buyer. I DO agree that you are limited to the timing of the contract – that is, you are forced to price before the contract delivery period whereas with a GPO it is wide open which is an advantage.

8.90-day contracts – SERIOUS price advantage to the grain buyer. At least we all agree on this one.

[TOM4CWB]

Chaffmeister;

Good points!

A wise man told me that grain prices cannot be predicted... therefore are based on chaotic weather and human emotional reactions.

Farmers can farm speculators from time to time... as the speculator can reduce the risk my farm carries... if I manage risk to mitigate risk.

Pools can mitigate risk as well... if the pools is managed well... different tools for people with different marketing skills.

It is only fair that we are allowed to employ our skills and gifts... no one is right or wrong, we are all different, therefore have different needs and aspirations.

I hope we as a society are mature enough to allow the CWB to continue as an option in a marketing choice future.

If we must destroy the CWB... that the CWB cannot be allowed to change... then sadly I must believe evil will have won the day.

[melvill]

Steve, I wasn't at all thinking you were being difficult. I was trying to add a little humor. Guess I'd better quite that. Humor never seems to come across in typed for the way it does any other way.

[bmj182]

Good post chafmeister, you really
cleared up some of the
misconceptions about the role of the
futures market in grain trading,
especially your points on ADM. It
was for this reason that the
commodities markets were
developed in the first place. It keeps
everything fair, and information is
shared by everyone. Knowledge is
power!

[Steve]

Chaffmeister

This thread was getting pretty boring, thanks for your help we got a little spark added.

I think my choice of words about you being confused was wrong, you do understand the basis very well, but the problem is I am trying to simplify marketing and you are trying to make it look more complex.

So why should I be concerned with something I can’t control.

You think farmers ( I ) don’t understand basis and therefore don’t know how to market properly.
Grain companies control the basis, so the simple explanation for basis is to say they are ( the grain company’s handling and marketing cost) we also need to add transportation cost and that varies with distance to market. ( to arrive at a net price to the farmer) There is no need to confuse farmers by mentioning the part about basis they have no control over.

You said, basis contract is not a bribe.
Basis contract is a signal by the grain company to the farmer that they want to handle your grain, but because of the competition a unrealistic low basis is offered and that could be considered a bribe. ( because the real basis are hidden) Basis contracts are not transferable to other grain companies, so that also proves that the so called public price ( you are talking about goes out the window) and is not the same for every company. I know from experience the offered price to producers on any given day is not the same by all grain companies. So I say the grain company has the advantage.

We can compare this to car sales.

Car sales are advertised: You can buy this car for 0% financing and no payment for 90 days.
Clear out 2002 models for only $100.00 over factory invoice.
I think that most business people know that that the real profit is not disclosed ( hidden ) the same applies to unreasonably low basis contracts.

GPO contract, a producer has a choice to ask his price for grain, (choice to me means I have the advantage ) and I don’t care what the company does with the grain or their basis if I get my asking price. So if you are trying to help someone, then keep it as simple as possible and don’t bring up things that don’t add value only add more of a gamble that he doesn’t need.

I have no choice when I have to sell wheat and barley to the CWB and have to take what they offer. ( CWB advantage and that is “BS” and should be easy to understand)

Now the hired labour category, sorry but you keep asking for it, we need all that you suggested, excluding (management advisor) because he’s not needed. The farmer doesn’t need that extra expense and besides if you need an advisor you in the wrong business.

I suggested producer marketing systems that doesn’t keep you at the marketing table every day, so you can spend more time with your family and things you enjoy in life.
It is not modeled for all producers, so go for whatever turns your crank.

[Steve]

Sorry for getting your mo-jo going chaffmeister but when you get a little upset, I sure get a lot of good information from you that is otherwise hard to pry out of you knowledgable boys on the market when your breathing slow.

Sorry again. The *** Kernel's marketing club, membership one thanks you for your comments. We will go head to head again real soon I hope.