CWB PRO/Implications for Fixed Price/Basis Contracts

[charliep]

Just a note to highlight yesterdays PRO and the implication for FPC/which crop year to price into. The CWB released another estimate for the 2000/01 year (old crop) as well as a forecast for 2001/02 (new crop). See the CWB website for the values. Notes below.

The premium of new crop over old widened slightly - eg. new crop 1CWRS 13.5 % $225 versus $206/t old (both Vanc/St. Law. based). For those that have waited, there appears to be about a $15 to $25/t potential benefit to waiting/pricing into current deliveries into the new crop year (I say potential given the new crop is not a price guarantee/you have to include the costs of not getting your money for an extra year). Durum is the exception with new crop still at a discount to old.

The discount for risk, time value of money and administration widened to $14.90/t with the main issue the fact the new 2001/02 PRO reflects some optimism on prices (higher risk factor versus current market). The premium the fixed price contract recieves over the Dec. MGE futures price converted to Cdn dollars actually was reduced slightly to $18.30 from the previous levels (just over a $/t).

If you are making the decision to use a fixed price contract on CWB old crop deliveries, do your calculations on grade spreads between the different payments and use this in your decision. No initial payments but the PROs give an indication. The spread between 1CWRS 13.5 and 2CWRS 12.0 is $26/t old crop and $15/t new - if carried into initial payments, this makes it more desireable to carry lower proteins unpriced into new crop. The 1CWRS 13.5/1CPSR spread is $47/t old crop and $49/t new - you loose $2/t (5 cents/bu). Do the math/post the question for you individual situation.

You only have another 3 working days to sign a basis contract. I still encourage people to sign up for at least 40 tonnes with at least 25 % of expected production a good target for many. Given it a try even if you and not comfortable with the mechanics and utilize an advisor to work through the process.

I look for others comments.

[crusher]

It shouldn't be a big surprise with the increase in CWB administration costs. With a possible 20% drop in the Western Canadian crop, there is that many less bushels for them to spread out their huge fixed overhead. I would anticipate that next week Ken Ritter will be announcing huge layoffs at the CWB to try and maintain fiscal responsibility. NOT!!!

Over the past five years, the initial spread on CPS to HRS #1 13.5 hasn't exceeded $36, I'm banking on it doesn't this year either.

[charliep]

A couple of things that I forgot.

If you are pricing old crop deliveries into the new pool use a fixed price contract. May as well get your money (everybody has bills this time of year). If you are still optimistic about wheat prices, talk to us about other alternatives.

New crop crop - use basis contracts. I think we will get better pricing alternatives this fall. Use the Dec. futures. If the rally hasn't occurred by then, it either isn't coming or we will look at the other tools.

IF YOU HAVE OLD CROP 2 OR 3 CWRS, MAKE SURE YOU FILL ALL YOUR 2000/01 CONTRACTS (PARTICULARLY IF YOU LIVE IN A COMMUNITY THAT HAD THE LOWER FALLING NUMBER PROBLEM DISCUSSED IN THE AREA). NEW GRADING FOR 2 AND 3 CWRS HAVE POTENTIAL TO MEAN YOU WILL LOOSE A GRADE BY CARRYING INTO 2001/02. BE PREPARED TO HAVE A MORE DIFFICULT THAN NORMAL DISCUSSION OVER GRADE WITH YOUR ELEVATOR - THERE IS GOING TO BE SOME INTERESTING POLITICS AS EVERYONE SORTS OUT QUALITY ON INVENTORY HELD JULY 31.

[charliep]

Crusher

A quick thought on your comment on grain volumes/impact on CWB costs. When I run my S&Ds for Canadian wheat and barley, my numbers would suggest that we will equal or excede this year sales (even under the worst of yield assumptions). To date (week 51) Canada has exported 12.7 MMT of wheat ex durum (14.1 MMT same period 1999/00). Durum is 3.4 MMT (3.5 MMT last year). Barley is 1.9 MMT (1.7 MMT). Total CWB exports crop year 2000/01. Total exports 18 MMT (19.3 in 1999/00). Numbers are from the CGC website (http://www.cgc.ca/Pubs/GrainStats/gsw-e.htm#Canadian%20Grain%20Handling%20Summary).

My July 31/01 total Canadian wheat stocks estimate is for about 9 MMT. To put things in perspective, I look at a 6 MMT carryover as small, 7 to 8 MMT is normal and 9 MMT is big. There will likely be some debate as to whether the stocks estimates are accurate but I will leave for another debate.

Bottom line - even with a smaller crop, the CWB will run a 17 to 18 MMT export wheat program next year. The impact will be a drop in carryovers. Barley exports will be down to the point it is just malt (likely 1 to 1.2 MMT of seed assuming the quality is there). Feed barley exports will be close to zero. I will post my S&D tables on Ropin the Web.