The CWB Basis Charges

[TOM4CWB]

Ration-Al;

The CWB SAYS:

"All sales revenue, less the costs of marketing, is returned to western Canadian farmers."

Let us look at PPO basis to see if this statement rings true.

CWB Basis Charges:
2002 wheat Fixed Price Contact PPO’s cost me $31.39/t or 86 cents/bu,… while 2001 basis cost only $6/t or 16 cents/bu.

By the way the CWB writing off $427,000 as bad debt expense to CWB “Buddies” is a legit basis expense for my farm alone costing 7.6 cents/bu. Many who paid our liquidation damages have a grievance about this fiasco.

THe CWB certainly found a way to tax back PPO supposed overpayments above the initial payments for grains delivered against 2002-03 contracts... from our 03-04 crop year CWB payments.

On the other hand, if I took the POOL;

EPO’s Basis charges for wheat in 2002 cost only 7 cents/bu; while Bly 02 cost 13 cents/bu, with 01 Bly costing 2.5 cents/bu.

Basis charges are being pocketed by the CWB in the Contingency Fund, which is allowed by the CWB Act to be negative… that is to say it does not have to maintain a positive balance.

Shorting the futures WITHOUT a basis leaves huge risk that I MUST speculate on what will CWB basis will be...for 04...

Which by the way Ration-Al has been very costly, more than my total profit margin on the wheat I grew.

The CWB basis charge @ 86 cents/bu was the single largest cost on my farm for my 2001 wheat production, yet my FPC still paid more than Pooling through the CWB.

All the Canola WE have signed production contracts on has been priced including basis for the fall of 04....

Ration-Al, I am supposed to go in blind with my historically single largest cost/bu on wheat undetermined?

[crusher]

Tom,

I haven't shopped around new crop canola basis yet. I was wondering if you found levels similar to the past, same, better or worse thatn 10 under.
I see huge crusher margins and was wondering how hard you ground Tom H.

[TOM4CWB]

Crusher;

I was working on Nexara and did some new crop Canola at the same time...

In Nov with freight allowance we were only a couple over your historic base.

We have been treated so well on our basis contracts over the years... that I haven't ground... we have been treated extremely well when we need to liquidate basis because of a seed shortage.

Fair is fair...

Sadly the CWB wants a massive basis profits and outrageous liquidation fines on top... things only a monopoly could get away with...

This Basis/Liquidation CWB charge is truly an area where the CWB can EXTRACT a premium...

out of us "designated area" growers...

as we have no choice!

YET

[JACKFLASH]

TOM4CWB

Have you heard if the CWB is offering the basis program for 04,05 crop year. Where we price off the Mlps. futures for spring wheat,until our basis month expires. Then automatically we are also eligible for EPO next fall?

Heard this rumour today, is this fact and how bad are going to get whacked on the basis.

[JACKFLASH]

TOM4CWB

Have you heard if the CWB is offering the basis program for 04,05 crop year. Where we price off the Mlps. futures for spring wheat,until our basis month expires. Then automatically we are also eligible for EPO next fall?

Heard this rumour today, is this fact and how bad are going to get whacked on the basis.

[TOM4CWB]

Jackflash;

My understanding of the 04-05 PPO program is this;

If I wanted to hedge the futures for CWRS for instance, I could short the MGE Spring wheat futures for Dec. 04.

At a point in the future that the CWB offers a basis on the 04-05 CWRS PPO, they will exchange the futures straight across to the PPO FPC at the value of the short position that was put on beforehand.

It is anyones guess what the Basis will be this year.

A major issue is what the CWB with the 02-03 PPO program... because even with taking a huge basis in the 01-02 crop year... on July 31st 03 the basis was the widest in PPO history.

The CWB could have "fixed the books" to show huge losses on 02-03 PPO futures transactions... and have transfered the funds to the pooling accounts (from the Contingency Fund) to reduce the deficit.

There is absolutely no way to audit this transaction system... because the CWB says it does not hold the PPO hedge in place until the grain is actually delivered..: "THE CWB UNWINDS THIS HEDGE BY BUYING BACK THE FUTURES AS THE CWB PUTS SALES ON THE BOOKS (ESSENTIALLY THE CWB IS BUYING THESE PRODUCERS OUT OF THE POOL ACCOUNT OR OUT OF ALL SALES). THEREFORE, MOST OF THE FUTURES BOUGHT BACK TO DATE WOULD HAVE BEEN PURCHASED AT VALUES HIGHER THAN THE CURRENT MARKET." (EMPHASIS ADDED)

This letter was written on Feb 24th 03... showing that the CWB does not match hedge positions with actual PPO contracts...

The CWB can construct whatever futures payment to the Contingency Fund... or to the credit of the Pooling Accounts... whatever political whim is their fancy on the day they create the PPO report for the Financial Statements.

What does this have to do with the Basis?

You or I cannot ever know what the basis was, as we cannot track the profits or losses that actually occured.

The CWB could know... but I suggest they do not... or they would not have admitted to the chaos that "risk management" on PPO's is in at the CWB.

Now what is a "fair" Basis?

History is a good teacher... but since we have no accurate PPO Basis history... Portland Basis averaged over the year is about as close as we can come.

Charlie;

Is there any was to figure out a basis off MGE Spring Wheat9for the last 3 years)... and figure it back to a #1CWRS 13.5px to compare against CWB pool payments?

If we come up with a reasonably accurate number... how political will the CWB be in setting the basis...?

How much extra Basis will the CWB take?

With no competition... it is impossible to even guess... which is why folks like AdamSmith tend to call this whole system a farce...

PPO's are a simulated cash price that are a cash cow for the CWB contingency fund... and the way they are accounted for now nothing can be tracked or proven one way or the other...

Except;

PPO holders are short some $25/t to $40/t ... you yourself have direct exprerence in this area, am I right Jackflash?

[JACKFLASH]

TOM4CWB

Yes sir, I have participated in the PPO program 01,02.,02,03.Losing $28t and $35t in those years.

Just because the CWB basis costs are too high to start and cost to roll are so high also.

I can't understand why the CWB has to exit the Mlps. wheat futures early,before the specified delievery month. How hard would it be for the CWB to delegate some individuals to follow the trade to end and exercise on our behalf. Instead of pulling a figure out of the air, to cover and potential move on the futures, so high that it makes the PPO program unworkable.

The PPO program that if managed well by the wheat board, would give us so called risk takers,more comfort in working with the CWB.
Thanks Tom for your clarity on the subject.

[crusher]

I've used PPO's with varying success. I didn't sign up in 02/03 - too risky, but could have hit the jackpot if priced in the fall. Got stung by the huge CPS/HRS spread the first year, but could have (should have) managed it better. This year I'm doing okay, hit some peaks in the marketplace, but keep getting blindsided by the Cnd buck. I've been hedging it the last few years, but sat by and watched this last 20% move. Took too many speculative hits in the head during January to March 03 and felt it was time to stay away from my broker. Wasn't someone just saying to avoid using your futures account for speculation. My second biggest blunder was not selling the canola futures first this fall and waiting for the basis to narrow in. Once again I was leary of having more margin calls ( ya ya I know it was a hedge). Anyway, would be nice to get more discussion on various marketing strategies, rather than bitch about the board.

[JACKFLASH]

CRUSHER
You are completely right. I"m sorry, I have a bad taste over the PPo's,and I will move on. We should be finding positive solutions for the future, instead of looking in the past.

I do use futures and options for hedging purposes, when the need arises. I have not done anything to date, but will very soon.

[TOM4CWB]

Crusher;

Somehow we must get a cash CWB price... how we get to this fundemental tool of marketing simplicity... is a mystery... but we MUST not give up till we have achieved a cash market...

Canola marketing seems to be changing so much with flat price production contracts... suits me just fine... a chicken in the hand is worth two in the bush any day. Canola seems to be the highest price for new crop in the fall before... a trend getting earlier each year.

THe CWB elections are on this fall... so a push now for changes like cash pricing may be most effective right now...

The CWB appears to be doing another producer survey... hope something positive comes out of the CWB strategic planning session starting Jan 19.

[crusher]

Cash pricing works for me, or all year basis, or quarterly pools. Many years I sell to the board on the last series, which must be brutal for the board's sales department, but hey that's the rules.

Did some Cargill IMC production contracts new crop - yields don't look sexy, but I've had okay success growing it in the past. Hadn't hedge any new crop so I thought this was reasonable risk management.

[TOM4CWB]

Crusher;

My thoughts exactly on the Canola... if 50% of my 04 production is done through a flat price production contract @ 10, then I have an excelent risk management package in place... now we need to buy 04 Nov Calls when Feb blues lower premium costs!

On the CWB, I am totally with you there as well... a little flex.C/W multi pools in a year, cash pricing... earlier prepricing... all would go a long way to add to our risk management tools!

[JACKFLASH]

TOM4CWB

Have you looked at the CWB's exchange for physicals program? What do you think?

[TOM4CWB]

Jackflash;

The program could work IF we were given a basis upfront... but the CDN$ is hard to hedge because of contract size... if I remember right it was $100,000.00 contracts. TO be forced to hedge this amount of wheat... at one time... when a person doesn't even know the basis is ... simply absurd.

The CWB simply are living on a different planet than farm managers that are actually risk adverse...

As farm managers we are responsible to mitigate risk... but the CWB expects us to create more total risk... than the hedge on a futures alone would reduce risk.

Thus the CWB answer for early hedges (before PPO's are avaliable) is a slick clever trick to misrepresent a futures exchange program as a significant risk management tool for the majority of "designated area" grain farmers.