Missing the wheat bull again

[craig]

Just read an interesting article on the current world wheat market. While producers in free market economies are selling wheat off the combine at record high prices and locking in attractive prices for the 2008 crop, we in western Canada are locked out because the board is more concerned with keeping FPC prices close to the pool than with providing market opportunity. All crop prices cycle and we need the opportunity to capture the highs for all crops. Isn't it nice that in western canada we are making so much money grain farming that we can afford to pass up on profitable prices. Who knows when the next wheat bull will happen but the one of the last 2 years has obviously passed us by.

[btjadenlepp]

i understand your frustration but to be fair, a basis contract through the cwb would have allowed this, still could.

not that it's a fair basis, not that it's a fair process, not that the basis makes any sense at all relative to world price levels, not that we can get much-needed delivery tied to pricing during different periods... just to say that if being in a position to price the crop at futures market highs is your goal, it's more possible through the PPO's than it used to be.

we've observed a fairly steady negative relationship between the basis and the futures in cwb pricing over the years, more so now with the adjustment factor. so as long as you have been or are bullish, a basis contract would be the solution to positioning yourself to capture the market highs.

sometimes it's especially risky to have the basis portion of the cwb price fixed heading into a new pro, because they tend to narrow the spread when the fpc gets too far above the pro, by worsening the basis. if you look back over the course of this year's pricing window this has been quite common. point is, there's a new pro out tomorrow.

i've also been wondering if there is any risk the cwb suddenly discontinues the fpc for this year, because of how aggressively many of us have been pricing under the ppo's. it says they can pull the contracts at any time all over their web site, and i've never seen such a consistently high premium in the fpc over the pro. either they're being too conservative in the latter, haven't sold much yet, or have some other way of managing that risk of having to pay farmers through the fpc more than they're actually making on pooled wheat sales.

[charliep]

I will have to think about btjadenlepp comments.

One of my issues is the CWB manages risk of the fixed price contracts relative to the entire pooling year. This means that pricing includes the inverse in futures contracts June 2008 forward (currently a buck a bushel). The last 25 % of the pooling year is sold in competition with new crop North Hemisphere winter wheat. This factor plus the western Canadian farmers (and perhaps CWB as through contract calls) likes to push deliveries into the last two months of the crop year.

One of the areas that has to be looked at over time is the splitting of pooling years similar to what has been done with feed barley. This will make the PRO more responsive to markets, improve fixed price contracts for farmers and reduce the CWB risk relative to pool accounts in operating the producer pricing options.

Only other comment is the producer pricing options will make the CWB a lot better risk manager. Up to the introduction of producer options, the CWB claim to fame (with the AWB a close) was being the worlds biggest long (read speculator). The producer pricing options mean they now have to manage risk for farmers and the pool accounts. This is both an opportunity for success and a ever present risk of disaster if they do things wrong.

[jensend]

the cwb will have to go because in offering different contracts it has become neither single desk nor an effective merchandiser. if you go back ten or fifteen years there were a number of marketing consultants who would tell you the cwb was doing a reasonable job of marketing wheat but poor on barley. since then with the variety of contracts they are offering there is a conflict between priced grain purchased and the pooled grain so that one or the other is always being done in such a defensive way that no one is satisfied. the pools are sometimes taking a hit for grain purchased badly on fpc's or ddc's, whatever and the priced contracts or basis contracts are unsatisfactory because the pools are at risk to cover bad purchases. get rid of the board and get things real again but it won't seem so rosy when american grain prices go back to where they are collecting large amounts of govt. support and canadian farmers are naked in the market.

[charliep]

The original post was about the ability to get market signals/pricing opportunities back to western Canadian farmers but will agree there is muddiness between the pooling accounts and the producer pricing options. Recognizing the annual report separates these two activities, there is need for more clarity around how the CWB manages risk and dollars put into the contigency fund for the producer pricing options.

[Fransisco]

Craig is right, while the rest of the world gets to retool and build up a cushion for the next inevitable downturn in the wheat market. Those of us trapped in the designated area will be lucky to squeak by again this year.

What a great way to compete in the global marketplace.

[craig]

While a basis contract would seem to make sense it's hard to make that decision because no one understands what the board is doing. It was quite common for us to lock in canola basis because we knew what a reasonable basis was and there was competition in the market place to secure supplies. Not sure that can be said for the CWB.

[Zaphod]

The key question is whether it is possible to lock in a price for 2008 production. I notice there is a massive inverse in CBOT wheat but not so much in MGE. Should a guy be selling the 08 futures already or will he get smoked on margin calls if the wheat market keeps rallying?

[charliep]

It may be a time when you use the CWB 08/09 programs to manage both currency and wheat futures risk. Also let the CWB worry about margin. Would you put a new crop old crop spread on as well (assumption that new crop problems would reduce/erase the inverse).

Off topic. To bring back to origin/deal with the 08 question, one of your biggest risk factors in this decision will be basis which craig has quite rightly highlighted has been inconsistent/lacking a connection to the market over the past 6 years it has been in operation. You also run the risk the CWB may change the rules.

[Zaphod]

When do those 08/09 programs come out? Isn't it in Feb 08? The wheat rally could easily be over by then.

[Zaphod]

I think I would avoid getting caught in the spread. If winter wheat crops look good in the US, EU and Ukraine, this market would have even more downside.

[melvill]

If the rules for the 08-09 crop-year are the same as for the 07-08 crop-year, producers can begin signing up tonnage for a CWB futures-first Dec basis contract. A futures-first contract locks in a U.S. wheat futures value and an exchange rate.

As for whether wheat producers should do that at this time of year, remember this: There are basically three risks that are part of that question -
1. futures price risk,
2. Canuck Buck risk - rising dollar, and
3. CWB basis risk.

If, as a producer, you can tie up two of those three risks through a futures-first basis contract, maybe, depending on one's analysis, that's a good thing.

Incidently, those are the same three risks that Canadian feedlots face and must deal with. However, it's not likely they would lock in a finished cattle futures and an exchange rate that far out since the cattle that would go to market in the fall of 08 haven't been placed on feed yet. Still, wheat producers aren't the only ones that need to analyse that potential situation.

[charliep]

They haven't updated the website yet but the futures first basis contract started Sept. 1 last year (as indicated by Lee). Clipped from the CWB site.

Wheat Basis Payment Contract – Start date - December 2007 futures only September 1, 2006 End date - CT November 1, 2007.

You are correct on your analysis of the spread/risk. One way of looking after margin risk but could backfire if 2007/08 wheat prices take off/everyone plants fence post to fence post wheat in 2008.

FPC stuff on CWB website at:

http://www.cwb.ca/public/en/farmers/producer/fixed/

Back to "Missing the wheat bull again".

[SASKFARMER3]

Today headline from England, With high wheat prices bread will have to go up but also meat because of the high cost of feed.
Price for top milling wheat $10.88 a Bushel Canadian in England.
But our CWB and Warbiton have a gentleman's Agreement Wink Wink Nudge Nudge.
Come on All this EPO PRO SHIT ETC is just a smoke Screen to make it look like their actually doing something for Western Canadian Farmers.
Does one CWB supporter actually think were going to get near $10.88 for their warbiton Contracts. HA.
Any one can come out and tell us that the PRO is $7.50 a bushel minus freight and an initial of $2.20 and wait and wait for the remainder here is some scraps oh we missed the market, excuse excuse and again another opportunity is missed. I for one have heard this same story for years and am getting really sick of it.
Another Bull missed.

[freenorth]

No matter how many pricing options the board has it still misses the point.

Here's an idea tell me what I'm going to get and when.

It is once again rediculous that we are at record futures prices and yet barely over $5/b.