How Many Farmers Have Signed Daily Pricing Contracts

[charliep]

The forms and a good description of the program are on the CWB website.

The steps clipped and pasted from this website. (http://www.cwb.ca/public/en/contracts/daily_price/index.jsp)

Step one: Sign up tonnage to the program from June 1, until July 21, 2006.

Step two: Price the reference (base) grade between August 1, 2006 and July 31, 2007.

Step three: Apply deliveries against the contract thereby locking in the cash spreads between the applied grades and the reference grade.
Note: Step 2 and 3 can occur in reverse order.

Don't know where the rumor was only good for people who sell into the US/use the producer direct sale got started. Has been/is available to everyone. Encourage all to look at the relationships between the DPC, FPC and the PRO from this past year in the CWB website.

http://www.cwb.ca/public/en/contracts/ppo_workbook/historical.jsp

[charliep]

Crusher

I thought I maybe should go over the whole process. Not really much different from what occurs with other contracts.

1) Deliver grain on your 2005/06 contract and put on a storage ticket.

2) Fill out and fax the CWB form indicating the volume and type of wheat you will be pricing (can be old crop). Form is on the web site.

3) Review the DPC prices and spreads starting August 1. You still have a decision as to when to price.

4) When you like the price, inform the CWB indicating it is grain held on a storage ticket. They will have rules in terms of contract numbers etc but the process is not likely much different than when you use to convert a CWB basis contract into a fixed price.

The frustration is why we have these two programs (FPC and DPC). They are different and involve different elements of risk (with risk being defined as a benefit or penalty).

The other thing Tom4cwb is asking is why you even have to go through these processes at the end of a crop year. The CWB easily could offer cash pricing in June and July with the risk sitting in the farmers hands who chooses to hold grain that late in the crop year (assuming full delivery). Offering a second pooling period would also move farmers down this road (as Vader has suggested).

[charliep]

Too many postings by me but I should note you can cash in your storage ticket after August 1 (ie. collect your 2006/07 initial payment) with a caveat you will have locked in the DPC grade and protein spreads on that day (you may want to delay a little to ensure you don't hosed on the spreads). Don't know how long it can last but you can hold off on the DPC until you get a base grade price you like and then cash in. You can deliver first and lock in a DPC later.

[rook]

Charlie, what are the differences between FPC and DPC? As I understand it, FPC priced off MGEX and DPC priced from Montana and ND. Is this correct?

[charliep]

The fixed priced contracts and basis levels are priced as a relationship to the most recent pool return outlook. You are in effect taking an early payment versus waiting for the series of adjustment, interim and final payments. The CWB risk management department hedges their futures price risk relative to the overall pool returns across the whole pooling year (September 2006 to July 2007). Their basis risk (starting this year) is protected with the basis adjustment factor which anyone who signed/will sign a basis will become very familiar with this fall. The spreads for grades and proteins are based off initial payments. THIS IS NOT A CASH PRICE.

The daily price contract is based off the average price of selected US delivery points. Price and grade spreads are based off the US markets that are surveyed. THIS PRICE IS A CASH PRICE BASED ON THE MARKET (NORTHERN US PRICES). No idea how the CWB manages the risk involved in this contract relative to overall pool returns (logic would say keep this program separate from the pricing pools but I suspect not the case).

Neither process is visible as to where the prices come from.

[charliep]

Oops. Second sentence/second paragraph from the bottom.

Protein and grade spreads are based off the US markets that are surveyed.

I should also note on the fixed price contracts that the CWB lifts their hedges during the year as delivery months approach/grain sales are made and money deposited in the pool account.

[crusher]

Took a look at the chart of PRO, FPC and DPC and went for a bunch of DPC. Hope a don't get pounded on the grade spread, sure took an ugly hit over the last week. Of course the market is shakey right now and we can't lock in for another two and a half weeks. (I know I could sell the futures and buy back later).

[charliep]

Crusher,

Hope you don't mind if I write down the relevant price information that was available on the day you made your decision.

2005/06 PRO - $109.68/tonne Alberta average ($156/tonne PRO minus $46.32 AB deduction). Payment pretty certain at this time. Suspect you could almost do as well in the domestic feed market.

2006/07 PRO - $122.68/tonne Alberta average ($169/tonne PRO minus $46.32). You will get initial payment plus adjustments and final. Actual number could be higher or lower.

Daily price contract on July 12 - $153.65/tonne ($240.84/tonne 1CWRS 13.5 minus $40.87 3CWRS discount minus AB deduction $46.32). The MGE September futures was US $5.24/bu and the loonie 88.32.

The fixed price contract (if you were able to use which you are not) for 2006/07 would be $151.66. I used yesterday's FPC of $235.98, the 1CWRS 13.5/3CWRS spread of $38 (assuming initial payment spreads are similar to that of the PRO) and the 2005/06 CWB AB deductions.

Implication - Based on the best information we have today, you have an opportunity to put an extra buck a bushel in your pocket (realizing the market is down this morning and could continue/the risk of harvest preasure as the Dakota's put crop in the bin).

Readers must get confused by my Dr. Jekyll and Mr. Hyde personality (suggest using on the one and bad mouth the program on the other). Unless you are extremely bullish and have all cash flow needs covered to December 31, I think you have to use this program. My policy issues are issues of being asked to sign a committed contract without a price being established and the complixity involved in the decision. In this case, why not have a price of $4/bu and let farmers make the decision to take it versus all the other crap (you have to go through the calculations) that is involved with this decision. That would eliminate all the crap/discussion at the end of a crop year as to which one is better/should be priced into.

[charliep]

Still looking for thoughts and questions about the daily pricing contract. Talked to CWB representative and they indicated about 300,000 tonnes had been signed up. I wouldn't delay your decision until Friday.

[WRAPper]

Talked to the one guy at the CWB in the country that I feel is the best at these PPO's, the concern I have on the DPC is where the spreads will be as well as the basis levels off the bat 300000 tonnes will want to trade in the first week of August? That's going to affect basis and grade spreads ,it's Likely a lot of 3 red thats going on the DPC whats the spread going to be, so will a person sit on this DPC until say October. I would believe there will be storage costs on this old crop wheat to be also taken into account( I need to check that this morning whether I'm correct in that assumption) Apart from that I do believe it's worth trying on a portion of Old crop that I intend to roll forward. I'm thinking 50 percent into a DPC and 50 percent into the 07 pool.
One other strategy to consider if you have the storage space is minimum deliver on your 06 contract FPC your carryover and find movement/Delivery in August prior to harvest. It will affect your first contract call by a percentage and result in you having more on farm storage needs but for a buck a bushel it'll take the sting away of cleaning up any grain piles you might have to make this fall.
One last thought on the basis thing the US spring wheat crop is going to have a tough week with heat so thats going to help keep the basis firm (we all are going to share in the heat as well so effects will be felt across the Can wheat crop as well)