Farmers
April/May 2006
PPOs make cents - Enhancements for 2006-07
The CWB board of directors has recently approved a number of enhancements to the Fixed Price Contract (FPC) and Basis Payment Contract (BPC) programs to ensure they better meet the business needs of farmers. You may wish to consider these changes in your future farm management decisions.
Enhancements include:
- Incorporating a 'Force Majeure' (sometimes called Act of God) clause into the contracts to limit pricing damage exposure if production is limited due to a severe event outside of your control;
- Listing the adjustment factor separately on the pricing schedule;
- Offering a Basis Price Contract for selected barley;
- Offering producers the opportunity to lock in a futures value for your 2007-08 crop starting September 1, 2006 using the Basis Payment Contract (BPC).
Limited 'Force Majeure' Option
Commonly known as an 'Act of God' clause, the 'Force Majeure' reduces a producer's exposure to pricing damages if a severe event occurs such as a natural disaster (flooding, severe drought, or significant hail damage.)
The clause is available upon contract sign-up. If you decide to select this clause, your contract value will be reduced by $3.00 per tonne. This amount will be deducted from your 2006-07 CWB payments and represents the increased risk the CWB is assuming in offering this clause.
This clause does not cover quality downgrading of your production. Feed quality is deliverable against the contract and subject to a discount at the time of settlement.
The 'Force Majeure' clause is limited to 100 000 tonnes, and is available for sign-up until May 1, 2006.
Producers can only commit a maximum of 50 per cent of their anticipated production applied to a contract containing the 'Force Majeure' clause. Any tonnage over 50 per cent of anticipated production will not be eligible for force majeure consideration upon invoking the clause.
The 'Force Majeure' clause is not transferable to another producer who is willing to assume the terms and conditions of the contract, but all other conditions remain assignable.
If a force majeure event occurs the producer must contact the CWB within 15 days of such an event and request declaration to invoke the clause.
For example, on April 14, 2006 a producer commits 300 tonnes to a CWRS FPC at $215.00 per tonne in store Vancouver or St. Lawrence based on the value posted on the CWB pricing schedule. The producer selects the force majeure provision upon sign up which reduces the FPC contract value by $3.00 per tonne ($215.00 - $3.00 = $212.00). The FPC commitment represents 30 per cent of the producers anticipated production based on a seeding intention of 1000 acres.
On May 16, 2006, the Minneapolis futures rally and the producer enters into a second CWRS FPC for 100 tonnes at $225.00 per tonne but doesn't select the force majeure provision.
On August 20, 2006, the producer calls the CWB to invoke the force majeure clause contained in the April 14 CWRS FPC, due to severe drought conditions that prevailed throughout the growing season and limited his or her production. The producer was only able to harvests 250 tonnes of No. 4 CWRS. Upon review and verification the producer is not responsible for the specified contract damages for non-performance on 50 tonnes as a result of the force majeure provision in his contract.
|
Contract date |
Contract type |
Force Majeure Option |
Contracted tonnes |
Production available for delivery against contract |
Force Majeure eligible tonnes |
|
April 14, 2006 |
CWRS FPC |
Yes |
300 |
250 |
50 |
|
May 16, 2006 |
CWRS FPC |
No |
100 |
0 |
0 |
|
Totals |
400 |
250 |
50 |
The producer's April 14, 2006, CWRS FPC will be reduced by 50 tonnes and $900.00 deducted from future CWB payments. The producer will have to assess their buyout and assignment options on the remaining 100 tonnes contracted. If the producer had selected the force majeure clause on the May 16 contract the producer would not have been responsible for the specified contract damages on an additional 100 tonnes.
Producers are required to read and familiarize themselves with the details of the terms and conditions of the contract and specifically the force majeure clause before entering into the contract.
Listing the Adjustment Factor separately on the Pricing Schedule
Prior to the 2006-07 program, an adjustment factor was included in the basis value offered by the CWB. The adjustment factor adjusts the basis value to account for the amount of priced sales already attributed to the pool accounts.
To accommodate sign-up of tonnage to FPC or BPC after August 1, 2006, the adjustment factor reflects the relationship between the spot futures and sales made to date.
The adjustment factor is dependent on current prices versus previous sale prices and can be either positive or negative depending on this relationship. Shown below is a chart illustrating the effect that the Adjustment Factor had in the 2004-05 crop year.
Adjustment factor = (average futures and foreign exchange on CWB sales made
to date - current futures) x percentage of pool sold.
Adjusted basis = estimated pooled basis -/+ adjustment factor
The adjustment factor will now be applied at the time of your tonnage commitment to the program and will be listed as a separate value on the pricing schedule. This will provide visibility of the adjusted basis in relation to the Pool Return Outlooks (PRO) and of basis risk when evaluating buyout decisions. Listed below are various examples of producers locking in BPC contracts, highlighted is the value that is locked in, on the applicable date. Values are for illustration only:
|
Example 1 |
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|
Action taken by producer |
Futures value |
Basis value |
Adjustment factor |
Value locked in on this date |
|
May 30, signs BPC |
||||
|
futures only |
$200 |
$22 |
$0 |
$200 |
|
Aug 20, signs the |
||||
|
basis portion |
$200 |
$20 |
$3 |
$20 |
|
Total value of contract |
$220 |
|||
|
Example 2 |
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|
Action taken by producer |
Futures value |
Basis value |
Adjustment factor |
Value locked in on this date |
|
Aug 15, |
||||
|
signs BPC basis only |
$0 |
$22 |
$3 |
$25 |
|
Aug 20, |
||||
|
signs the futures portion |
$200 |
$20 |
$3 |
$200 |
|
Total value of contract |
$225 |
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|
Example 3 |
||||
|
Action taken by producer |
Futures value |
Basis value |
Adjustment factor |
Value locked in on this date |
|
Sept 25, signs FPC |
$200 |
$22 |
$3 |
$225 |
Full-scale BPC program for select barley
The BPC gives producers the flexibility to lock in their basis first and price the futures or vise versa. The contract will follow the domestic feed barley market with the ability to take advantage of market rallies that may occur during the crop year. The futures component is based on the Winnipeg Commodity Exchange (WCE) Feed Barley contract and the basis will reflect the malt premium to spot feed barley prices.
Designated barley BPC calculation:
designated barley BPC = designated barley basis + adjustment factor + futures
The CWB offers daily values establishing a basis from the reference grade Pool Return Outlook (PRO), less forecasted futures, less a discount for risk, time value of money and administration. The basis and futures for both the FPC and BPC are based on the reference grade PROs of standard select two-row and standard select six-row. Producers receive full payment within 10 business days of delivery and do not receive additional payments from the CWB pool account.
The BPC and FPC provide pricing flexibility prior to having their barley selected. Please see chart for the basis values that were available during the sign up period for the 2005-06 crop year. The chart is illustrating the basis values for designated barley standard select Two-row and are shown as a positive (above) to the WCE Western Barley Futures.
Producers can commit their select barley to an FPC or BPC until November 1, 2006 at 7:30 am C.T. or until the program tonnage cap is achieved. The BPC contract for select barley was first offered in May 2005 as a pilot program and was only available through participating maltsters. For the 2006-07 crop year the program will now be available for all selected barley deliveries including those to grain companies.
New crop values available in the fall using BPC
Starting September 1, 2006, producers can lock in the futures one-year in advance of harvest using the BPC program.
The CWB will offer the U.S. December futures price in Canadian dollars for each of the seven classes of wheat. Producers can lock in the futures first and then price their basis starting at the end of February 2007 when the first new crop PRO is released. The basis can be locked in between the end of February and October 31, 2007.
Example - Locking in the futures in the fall for 2007-08
On November 22, 2006, a producer decides the December 2007 Minneapolis Red Spring futures are trading at favorable values and locks in $215.00 per tonne or $5.85 per bushel using the BPC. The producer anticipates average basis levels and will lock in the CWRS basis prior to October 31, 2007.
On October 21, 2007 the December 2007 basis is $20.00 per tonne or $0.54 per bushel and the producer locks in this value against the BPC. The producer establishes a price of $235.00 per tonne or $6.39 per bushel for the reference grade of No. 1 CWRS 13.5 in-store Vancouver or St. Lawrence. The producer takes into consideration deductions for freight and handling at their delivery location of $49.61 per tonne or $1.35 per bushel. The farm gate value of the BPC is $185.39 per tonne or $5.04 per bushel.
|
$ per tonne |
$ per bushel |
|
|
Futures lock in value November 22, 2006 |
$215.00 |
$5.85 |
|
Basis lock in value October 21, 2007 |
20.00 |
0.54 |
|
BPC price |
235.00 |
6.39 |
|
Freight and handling |
49.61 |
1.35 |
|
Farmgate value |
$185.39 |
$5.04 |
Producers can benefit by accessing the futures lock in using the BPC in the fall to:
- Provide more certainty about margins when planning seeding intentions.
- Take advantage of future market rallies.
- Increase the producers' ability to lock in foreign exchange rates.
- Manage futures and foreign exchange with less complexity and at lower costs.
- Manage smaller tonnages using the BPC with a minimum 20 tonne commitment vs. using futures contracts of 136 tonnes or 5000 bushels.
The CWB will not accommodate Exchange for Physicals (EFP) transactions starting with the 2007-08 crop year. Managing futures and foreign exchange accounts is complex with few producers utilizing EFP transactions. Producers can access the same service through the CWB using the BPC program.
Farm Business Representatives are willing to meet with farmer groups to hold PPO workshops. As well, you can call 1-800-275-4292 for more information on the PPOs.