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Canadian Wheat Board

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Farmers

Daily Price Contracts

Program information

DPC questions and answers

Program information

What is the Daily Price Contract (DPC)?

The DPC, program for 2006-07 is a pricing option for wheat that provides producers with an opportunity to capture a daily cash price based on U.S. grain elevator prices. The DPC is another marketing choice for producers, enhancing a mix of pricing options available through the PPO programs.

How does it work?
Three steps involved

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.

Sign up period

Sign-up for the program began June 1, 2006 and ended at 8:30 a.m. CT on July 20, 2006.

During the sign up period, producers indicated the class of wheat and tonnage amount they wish to commit to the program and agreed to price their contracts during the pricing period of August 1, 2006 until July 31, 2007. The minimum sign up amount is 20 tonnes. Tonnage commitments can be decreased before July 31, 2006 for a $15 per transaction administration fee.

Forms

The pricing forms will be available beginning August 1, 2006 for the 2006-07 crop year.

DPC reference (base) grades
Wheat class Reference grade Futures markets
CWRS No. 1 CWRS 13.5 Minneapolis Hard Red Spring
CWHWS No. 1 CWHWS 13.5 Minneapolis Hard Red Spring
CWES No. 1 CWES Minneapolis Hard Red Spring
CPSR No. 1 CPSR Kansas Hard Red Winter
CPSW No. 1 CPSW Kansas Hard Red Winter
CWRW No. 1 CWRW Kansas Hard Red Winter
CWSWS No. 1 CWSWS Chicago Soft Red Winter

Please see the 2005-06 pricing schedule for current pricing information and the historical prices for trends.

Cash spreads for all other deliverable wheat grades will be posted during the pricing period beginning August 1, 2006, and are locked in on the date of initial payment settlement.

Pricing period

Producers can price their DPCs from August 1, 2006, until July 31, 2007. The CWB will post a reference grade DPC value every business day for each of the seven classes of wheat. The daily price will be offered as a flat price value, quoted in store Vancouver or St. Lawrence. A separate basis and futures contract is not available under this program.

The minimum pricing commitment is twenty tonnes per transaction. Any tonnes not priced by July 31, 2007 will be auto priced on that date.

Pricing schedules
DPC reference grade prices

The pricing schedules listing the reference grade DPC in store Vancouver or St Lawrence values for each of the seven classes of wheat will be posted during the pricing period from August 1, 2006 until July 31, 2007, and will be in effect from 2:30 p.m. until 7:30 a.m. the following business day.

If you deliver grain from your 2005-06 harvest to storage against 2005-06 delivery calls, you can price this grain using the 2006-07 DPC after the start of the pricing period on August 1.

DPC cash spreads

Another pricing schedule, listing the cash spreads for all deliverable wheat grades will also be posted during the pricing period. This schedule is released daily at 7:00 a.m. C.T. and is in effect for settlements made each business day.

Application of deliveries

Producers can choose to apply deliveries against the DPC by advising the elevator to record the DPC number on their cash purchase tickets. The elevator will issue the producer the initial payment for the settlement grade, less freight and handling. The cash spreads posted on the date of initial payment settlement will be automatically applied against those deliveries.

DPC payment

Within 10 business days of the elevator reporting the deliveries, the CWB will issue the producer a payment for the balance of the contracted price. The payment is based on:

The producer’s DPC reference grade price +/– cash spread of the settlement grade - initial payment of settlement grade.

DPC example (for illustration purpose only):
Step 1

On July 15, 2006 a producer signs up 100 tonnes under the DPC program, selecting the Canada Western Red Spring (CWRS) class of wheat.

Step 2

On September 1 the producer prices the entire 100 tonnes at $200 per tonne in store, based on the reference grade 1 CWRS 13.5.

Step 3

On September 15, the producer delivers 50 tonnes of No. 1 CWRS 14.5 and 50 tonnes of No. 3 CWRS, receiving the initial payment of $160.00 and $130.00 per tonne in store.

The elevator applies the DPC number to the cash tickets and reports the deliveries to the CWB. By applying these deliveries against the DPC on September 15, the producer has locked in the cash spreads that were in effect at this time. In this example the cash spreads for 1 CWRS 14.5 and 3 CWRS on September 15 were posted at $20 and -$35 per tonne.

To determine the producer total realized DPC price, the cash spreads in effect at time of initial payment settlement are added or subtracted from the reference grade contracted price:

  Reference grade    
Settlement grade DPC price Cash spread Realized DPC price
1 CWRS 14.5 $200.00 + $20.00 = $220.00
3 CWRS $200.00 + $-35.00 = $165.00
DPC payment
Grade delivered 1 CWRS 14.5 3 CWRS
Realized DPC price $220.00 $165.00
Less: Initial payment (from the elevator) $160.00 $130.00
DPC payment (from the CWB): $60.00 $35.00

The producer is now paid in full for these deliveries.

Pricing and delivery commitments

Tonnes committed to the DPC program must be completely priced by July 31, 2007. Any unpriced tonnage will be automatically priced by the CWB on this date. Contracts that are not fully delivered by July 31, 2007 will be assessed pricing damages using the pricing schedule in effect on this date. See the buyout calculation below for more details.

If a producer cannot completely fill their contract, the following options are available:

  1. Assign the contract to another producer. A $15 per transaction administration fee will be assessed to the original contract holder.
  2. Buyout of the contract. The buyout calculation is the greater of:
    Current FPC– contracted DPC + $15 administration fee
    OR
    Current futures – contracted futures + $15 administration fee

For more information regarding the DPC program, please refer to the DPC user guide or call 1-800-275-4292.

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DPC questions and answers

When and how can I sign up?

For the 2006-07 crop year, producers will have to commit to the contracts prior to the start of the crop year, as they did with the preliminary versions of the FPC and BPC contracts. DPC sign up will begin June 1,2006 and will run to July 21, 2006. There will be a limited sign-up of 500 000 tonnes.

For the2006-07 crop year first DPC pricing schedule will be posted August 1, 2006. The last day to price your contract will be July 31, 2007. It is important to note that daily prices will be subject to more volatility than FPC and BPC values.

Why is the sign up deadline July 21?

There are a number of reasons for this sign-up deadline. The CWB's Risk Management department 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 at a premium of the pool and other times when it will be at a discount. Without a signup deadline prior to the start of the pool producers could choose the better of the two prices and dilute the end value of the pool or remove grain from the pools, which could impact sales opportunities.

What if I can't fulfill the terms of the contract?

Producers can opt out of these contracts up to the July 31 for a $15 administration fee. After the start of the crop year, the producer will be subject to pricing damages similar to the FPC/BPC contracts. Pricing damages will be the greater of the basis risk change or futures losses, plus the $15 administration fee.

(Current fixed price contract – DPC)
or
(Current futures value – futures value on date of DPC lock in)

Why is sign up capped at 500 000 tonnes?

Similar to the introduction of previous PPO contracts, the DPC will be offered with a tonnage limit to ensure the viability of the contract. Based on its performance and producer feedback, the sign up limit may be increased in the future, and may also be expanded to include durum and barley.

How is the CWB determining the DPC?

The DPC will be an average of a basket of North Dakota and Montana elevator prices. A reference grade DPC price will be posted for each of the seven classes of wheat, and quoted as an in store Vancouver or St. Lawrence value. Producers will have to deduct rail freight and handling to arrive at a farm gate price.

Why isn't the CWB showing us how the DPC price is calculated? What U.S. elevators will you be using?

The CWB will not name the specific delivery locations from which it will derive prices, because these will be changing over time and the DPC will be a blended value reflecting a number of U.S. delivery points. The points will change to ensure that the prices going into calculating the CWB daily price represent true prevailing market conditions. At times local conditions, such as elevator space or transportation problems, can unduly influence local elevator prices. These anomalies cannot remain in the equation if the goal is a true daily price.

Is it possible for the spot price at a U.S. elevator located a few miles from my farm to be higher than the DPC value on any given day?

The DPC reflects an averaged U.S. elevator price, and from time to time may be less than a specific local U.S. elevator price. If a producer wishes to capture such a premium, they can price their DPC contract in conjunction with the CWB Producer Direct Sales program effectively locking in a spread to access the U.S. market.

Do I have to deliver this contract to a U.S. elevator?

No. This contract was developed to provide all producers with a U.S. equivalent price for deliveries applied against their CWB delivery contracts.

Since the CWB will only be posting a reference (base) grade DPC price, how will I know what my wheat is worth if I deliver a grade other than the reference grade?

A set of cash spreads specific to the DPC program is posted daily for all grades and protein levels for wheat.

How do I lock in the cash spreads for my deliveries?

Cash spreads in effect on the date of initial payment settlement will be automatically applied against your contract.

Why are the DPC cash spreads different than the initial payment spreads?

DPC cash spreads reflect the daily cash market spreads between varying grades and protein content of wheat and can change in value every day. The initial payment spreads are set at the beginning of the crop year based on a long-term price outlook. As the crop year progresses, these spreads are reset as adjustments to the initial payments occur.

Can I apply deliveries to my contract before I price it?

Yes. The elevator will issue the initial payment based on the settlement grade and apply the deliveries against the contract. The CWB will issue the DPC additional payment after you price the reference grade portion of the DPC.

How can I lock in the DPC cash spread if my grain has not been called for delivery yet?

Deliveries opportunities are based on Series A, B, C contract calls. You will have the ability to lock in the cash spreads for the amount of tonnes that are currently called for delivery.

What is the discount for applying feed grades to my contract?

There will be no additional discount applied to your contract for feed grade deliveries. The DPC cash spread for feed grades in effect at the time of initial payment settlement will be applied against your contract determining your final contract price.

I have multiple contracts (DPC, FPC and EPO), does it make a difference which contract I deliver against first?

It's your choice. When settling your deliveries at the grain elevator, ensure the staff apply the correct contract numbers to your cash purchase tickets.

I applied deliveries against my DPC, but haven't priced it yet. Will I receive CWB adjustment payments on these deliveries until my contract is priced?

No. If your deliveries are applied to a DPC you will receive the initial payment at the elevator and no further adjustment, interim or final payments from the CWB pool account. Instead, you will receive a DPC payment from the CWB after you price the reference grade portion of your contract. This payment represents the difference between your contracted price and the initial payment already received from the elevator:

DPC additional payment = DPC reference grade price +/-cash spread of settlement grade – initial payment of settlement grade

What happens if I don't price my DPC contract by July 31, 2007?

Any tonnage remaining to be priced will be automatically locked in on July 31, 2007. Producers who cannot fill their contracts, or wanting to reduce their commitments, can assign their contracts to another producer prior to this date. They also have the option to buy out their DPC. The buyout cost is the greater of:

(Current fixed price contract – DPC)
or
(Current futures value – futures value on date of DPC lock in)

Why do I have to price my entire contract by July 31, 2007? If the market prices are too low, can't I just cancel the tonnes remaining on my contract?

If the condition to price your contract by July 31, 2007 was not required, the DPC could be used to arbitrage the pool account. That is, producers would have the option to deliver against the DPC whenever the price exceeds the pool. Alternatively, if the pool account is priced higher than the DPC towards the end of the crop year, producers could deliver into the pool and cancel their DPC commitments at no cost.

Can I lock in the basis only and price the futures later under the DPC program?

No. The DPC is offered as a flat price contract only, there is no separate basis and futures contract. You can still sign a basis contract under the CWB basis payment contract (BPC) program.

I plan to use the DPC with a Producer Direct Sale (PDS). Do I have to complete the two transactions at the same time?

No, you can price the DPC before or after you complete a PDS. By locking in the values on different days you leave yourself exposed to the PDS/DPC spread widening and increasing your cost to access the U.S. market. On the other hand the spread may also narrow in your favour.

Why is the PDS value higher than the DPC ? I thought they were both priced off the U.S. market?

The DPC is a U.S. elevator equivalent 'buying price'. The PDS is the CWB asking or 'selling price'.

The PDS reflects the CWB's asking price for sales into the U.S. market to end use customers. The PDS is based off daily U.S. market prices and is comprised of the daily relevant U.S. wheat futures price plus the CWB sales basis.

The DPC is also based off the same daily U.S. wheat futures and a basis prices. The basis offered to producers will be similar to the basis levels available to U.S. producers delivered into local elevator locations.

Since the PDS and DPC are both determined using the same daily futures values, if there is a difference in price, it will be a result of differing basis levels between the PDS and DPC. The spread between these basis levels will be the producer's cost to access the U.S. market.

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