Farmers
November/December 2004
This is our fifth installment of a series focusing on Farmer Bob's use of the CWB producer pricing options for his wheat marketing activities. As we learned from our previous visit with Bob, he has completed harvest, producing 860 tonnes of Canada Western Red Spring Wheat (CWRS) and 175 tonnes of Canada Western Hard White (CWHW), both grading No. 1 with 14 per cent protein. Bob had already contracted 115 tonnes to a Fixed Price Contract (FPC) and 100 tonnes to a Basis Payment Contract (BPC).
He has not signed any additional FPCs, as the U.S wheat futures markets have remained weak throughout harvest, resulting in unattractive contract values. However, the CWB basis levels have improved considerably. In fact, the basis levels are now at the best levels since the programs were first offered.
Bob feels that the U.S. futures might improve sometime before the end of the crop year. If he locks in a May or July basis before the October 31, 2004 sign up deadline, he will have the opportunity to price his BPC directly off the U.S. futures when the market values improve. If , however, the values do not improve, Bob is at risk of locking in a contract value below his expected returns. Therefore, to offset this risk, he decided to commit half of his CWRS and all of his CWHW production to the CWB pool accounts. The pool accounts are an additional marketing tool that provides a price averaging strategy.
An additional feature of the pool accounts is the option to sign up an Early Payment Option (EPO) contract. The EPO program will provide him with additional cash flow following delivery. Since Bob has already filled the first Series-A delivery call with his existing FPC and BPC commitments, he won't sign up an EPO contract until there are additional delivery calls in place.
Summary of Bob's pricing strategy to date:
| Wheat class |
Total production (tonnes) |
Tonnes already committed to FPC |
Tonnes already committed to BPC |
Tonnes already committed to the CWB pool (may use EPO) |
Tonnes remaining to commit to BPC |
Per cent of total production committed |
|---|---|---|---|---|---|---|
| CWRS | 860 | 115 | 100 | 430 | 215 | 75% |
| CWHW | 175 | 0 | 0 | 175 | 0 | 100% |
On October 13, 2004, Bob signed up the remaining 215 tonnes of his CWRS production to a May 2004 Basis contract at $20.57 per tonne over the Minneapolis futures contract. By signing a May basis, Bob has until April 29, 2005 to price the futures or roll the basis to July. His entire 2004-05 wheat production is now contracted.
From our last meeting in September, Bob told us he still had a 20-tonne December 2004 basis, without the futures locked in. Instead of pricing the futures now, Bob rolled the December basis to a March basis position on September 30, 2004.
Bob's rolled basis
| Rolled basis* | = original basis + (December futures settlement price -March futures settlement price) |
|---|---|
| = $14.47 + ($166.52-$171.50) | |
| = $9.49 | |
| *Based on September 30, 2004 settlement prices. All values $Cdn per tonne in store Vancouver or St. Lawrence. | |
By rolling a December basis to a March position, Bob's original basis will be reduced by the $4.98 per tonne carry between the December futures settlement price and March settlement price on the day of the roll. Bob's original $14.47 per tonne December basis is now adjusted to a $9.49 March basis. If the December futures were trading at an inverse to the March futures (i.e. December is trading at a higher value), Bob's adjusted basis would have improved.
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.