Newsroom
2005
New CWB program uses U.S. spot prices to give farmers full range of choices
Feb. 15, 2005
Saskatoon - The CWB today launched its most innovative producer payment option to date -- one that lets farmers choose a price for their wheat based on a daily cash price derived from U.S. elevator prices. The Daily Price Contract (DPC) will provide farmers with choices to allow them earlier cash flow and increased pricing flexibility.
Ken Ritter, chairman of the farmer-controlled board of directors, told reporters attending a Saskatoon news conference that the DPC represents a historic shift for the CWB, a former Crown Corporation that was reorganized as a farmer-controlled
marketing agency in 1998. "I sit at the board table with nine other farmers from across Western Canada. Together, we are committed to providing farmers with a full range of pricing choices, while protecting the marketing clout of the single-desk,"
Ritter said.
"When combined with the full portfolio of producer payment options, the DPC can provide most of the functions of a so-called dual market to Prairie farmers without destroying the single sales desk and pooling," noted CWB President and CEO Adrian
Measner. "The program gives Prairie farmers the ability to track markets daily and receive prices that are derived from daily cash prices at U.S. elevators."
The DPC will be available as a limited pilot program in the 2005-06 crop year (August 1, 2005 to July 31, 2006), with farmers able to sign-up tonnage from June 1 to July 22, 2005. There will be a 500 000-tonne-limit on sign-up for the first year. The CWB will begin posting a daily cash price on June 1 to help farmers become familiar with the program and farmers can begin pricing their wheat under the program on August 2, 2005.
Recognizing the strong support pooling continues to receive from producers across the Prairies, the DPC has been designed to be revenue neutral to the pool accounts, as is the case with all the other pricing options, Ritter noted. The DPC will also be accessible to all Prairie grain producers, not just those living within easy driving distance of the U.S. border.
"The daily price will be derived from a basket of elevator points south of the border and will be posted daily by the CWB as a cash price per tonne or bushel," said Measner. "As with the Fixed Price and Basis Payments contracts, this grain will continue to be marketed through the CWB."
The DPC will also make it easier for individual farmers to market niche and high-value products such as organic grain, Measner said, as U.S. prices are currently used by the CWB to determine the price of Producer Direct Sales contracts.
A backgrounder answering questions about how the DPC will work and providing examples of how a farmer can use the program is attached to this release.
Controlled by western Canadian farmers, the CWB is the largest wheat and barley marketer in the world. As one of Canada's biggest exporters, the Winnipeg-based company sells grain to more than 70 countries and returns all sales revenue, less marketing costs, to Prairie farmers.
For more information, please contact:
Louise Waldman
Manager, Media Relations
Cell: (204) 479-2451
News conference photo. Left to right: Ken Ritter and Adrian Measner.
Daily Price Contract Q + A
What is the Daily Price Contract (DPC)?
The DPC is the fourth Producer Payment Option (PPO) created by the CWB to provide Prairie farmers with an additional option for the pricing of their grain. The other PPOs are the Early Payment Option (EPO), Fixed Price Contract (FPC) and Basis
Payment Contract (BPC).
The DPC price will be available daily and will reflect U.S. cash prices.
The DPC will provide farmers with another choice when it comes to pricing their grain.
How will the DPC affect the pool accounts?
Like all PPOs, the DPC has been designed to be neutral to the pool accounts. With a July 22 sign-up deadline the CWB has ensured that appropriate risk management measures can be taken.
Farmers who participate in DPC/BPC/FPC contracts determine their prices outside of the pools. Risk management tools used by the CWB, combined with a contingency fund, backstop these payments to producers. Pool accounts are not affected by any PPO contracts.
Why would farmers want to use the DPC?
The DPC enables farmers who so choose to price their wheat (in 2005-06, the DPC will only be available on the seven classes of non-durum wheat) at prices that will reflect cash values at
U.S. elevators.
These prices will be posted daily and farmers can choose the available market value they want to sell their grain at. It is important to note that daily cash prices, by their nature, will be more volatile than the FPC and BPC contract values.
For farmers who aren't located close to the U.S. border, the program will provide them with the option to pursue similar values at their local elevators. Unlike the ability to deliver to U.S. elevator points, farmers further from the border can also benefit from this program.
What impact does this new PPO have on the Producer Direct Sales (PDS) program?
The PDS is based on the price that the CWB would sell a specific grade of wheat at in the U.S. market. Since both the DPC and PDS are based on U.S.
market values, they will track each other closely. Therefore a farmer wishing to complete a PDS can use the DPC to lock in the spread he or she will have to pay to the CWB.
How can farmers sign up for a DPC?
Farmers who want to participate in the DPC must sign contracts committing tonnage by July 22, 2005. Sign-up begins June 1, 2005, when pricing information will also become available to enable
farmers to familiarize themselves with the pricing relationships under this program.
Why is the sign-up deadline July 22?
There are a number of reasons for this sign-up deadline. In order to manage risk the CWB has to know, in advance of the start of the pool, how many tonnes need to be hedged to protect the
pool accounts and prevent a shortfall. The DPC is priced independently of the pool account. Therefore there will be times when the DPC price is above the pool and other times when it will be below the pool return. Without a sign-up deadline prior to
the start of the pool, hedging would not be effective and the pool return could be diluted.
What if a farmer cannot fulfil the terms of the contract?
Farmers can opt out of these contracts up to the July 22 sign-up deadline for a $15 administration fee. After the start of the crop year, the farmer will be subject to
pricing damages similar to the FPC/BPC contracts. Pricing damages will be the greater of the cash price change or futures losses, plus the $15 administration fee.
The DPC at work
The following two scenarios are examples of how the DPC might work on its own and as a risk management tool for a Producer Direct Sale (PDS) contract. All figures represent dollars per tonne and are presented for the purpose of illustration only.
DPC payments
Example A
On July 15, 2005, Farmer Bob commits 100 tonnes of Canada Western Red Spring wheat to a DPC contract, and the contract is recorded with the CWB.
On August 2, 2005, the CWB releases the first pricing schedule for the DPC. Bob reviews the prices on the CWB Web site. He holds off on pricing, thinking the price will increase later in the year. When his wheat harvest is completed in September he has mostly No. 1 CWRS 14.5 in the bin, along with some No. 3 CWRS.
On September 30, 2005, Bob prices 50 tonnes of his DPC at $206.16 per tonne and delivers the same day. He delivers 25 tonnes of No. 1 CWRS 14.5 and 25 tonnes of No. 3 CWRS, which the elevator manager applies against Bob's DPC.
| Bob's payments for Sept. 30 deliveries: | ||
| 1 CWRS 14.5 | 3 CWRS | |
| DPC Contract Value | ||
| (based on No. 1 CWRS 13.5 reference grade) | $206.16 | $206.16 |
| DPC spread (Reflects daily cash prices for grade delivered) |
$29.55 | -$47.57 |
| Total payments | $235.71 | $158.59 |
If the deliveries were made later in the year, an incremental payment to offset Bob's time value of money would also be included. This value is built into the operating costs of the program and deliveries made later in the year will have a lower cost to the CWB. The incremental payments reflect that fact to farmers and are a common feature for all CWB Producer Payment Options.
Example B
Farmer Bob wants to make a producer direct sale to a U.S. buyer, which assumes the same DPC prices and a PDS value of $240.00 for No. 1 CWRS 14.5 and $162.00 for No. 3 CWRS. The DPC payments would be calculated as in Example A.
| DPC-PDS payments: | ||
| 1 CWRS 14.5 | 3 CWRS | |
| PDS payments (Bob to CWB) |
$240.00 | $162.00 |
| DPC Payments (CWB to Bob) |
$235.71 | $158.59 |
| Net PDS outlay | $4.29 | $3.41 |