Farmers
Daily Price Contracts
Changes to the 2007-08 DPC program
As part of its ongoing commitment to provide farmers with better tools to manage their businesses, the CWB has expanded the Daily Price Contract (DPC) program for the 2007-08 crop year.
The CWB is increasing the program’s tonnage limit to 650 000 from the 500 000 tonne limit in 2006-07. To help ensure as many farmers as possible have access to the program, a per-farm limit of 5 000 tonnes is also being introduced.
Interested farmers can sign-up a DPC for the 2007-08 crop year starting from June 18, 2007 to July 20, 2007. As was the case in previous years, sign-up is on a first come, first served basis. Once the program tonnage limit of 650 000 tonnes is reached, sign-up will be terminated without any prior notice. Sign-up will start at 9:00 a.m. CST on June 18.
The DPC is designed to provide farmers with additional price flexibility and to increase their ability to manage cash flow. U.S. elevator bids and market price relationships are used to establish daily cash prices for each class, grade and protein level of wheat. The program is one of the range of Producer Payment Options (PPOs) the CWB now offers producers, and like all other PPOs, the DPC is guided by the principle that it must be consistent with the maintenance of a competitive and viable pooling option.
The price risk associated with higher futures movement on any given day can be offset by the CWB hedging program. The CWB sells futures when the farmer locks in the DPC reference grade value and buys futures against the tonnage in the program according to the CWB sales pace. Compared to other PPOs the CWB offers, there is considerably more unhedgeable basis risk for the DPC. One source of this additional risk is the use of a single market – the northern tier of country elevators in the United States – to determine DPC pricing, when sales are made against a number of other market price structures with varying basis levels.
There are currently no effective risk management tools available for the types of basis risk inherent to the DPC. At the time the DPC was structured, it was hoped that the Minneapolis wheat index futures would provide a mechanism to hedge a portion of the basis, however, they only trade sporadically, and have not provided an effective risk management tool. Without a reliable method to manage basis risk, the CWB needs to increase the adjustment for risk to deal with a higher-than-expected basis risk associated with the DPC program.
The CWB intends to increase the risk discount by approximately $5 per tonne from the current 2006-07 program levels to offset the higher level of basis risk, which means the daily prices offered in 2007-08 may be lower than historical comparison may suggest. However, the changes to the way daily prices are established will improve the long-term viability of the DPC program.
As part of the DPC operating guidelines, the CWB is also committed to keeping the spread between the DPC and the Producer Direct Sale (PDS) relatively narrow and stable with the proviso that under exceptional circumstances, the spread could be widened to protect grain that was required for the CWB marketing. This provision has never been exercised. The linkage between the PDS and the DPC provides farmers with the assurance that both the DPC and PDS will track the average price to cross border elevator prices for grain of similar quality. If the DPC price is low relative to an elevator across the border, then selling to the U.S. using the PDS should be attractive. Conversely, if the PDS is high relative to the cross border prices, then the DPC is also likely to be high.
Program information
What is the Daily Price Contract (DPC)?
The DPC, program for 2007-08 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 18, until July 20, 2007.
Step two: Price the reference (base) grade between August 1, 2007 and July
31, 2008.
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 begins at 9:00 a.m. CST on June 18, 2007 until July 20, 2007 and is on a first come, first served basis. When the 650 000 tonne limit is reached, the sign-up period will be terminated without prior notice.
During the sign up period, producers indicate the class of wheat and tonnage amount they wish to commit to the program and agree to price their contracts during the pricing period of August 1, 2007 until July 31, 2008. The minimum sign up amount is 20 tonnes, and there is a maximum per farm limit of 5 000 tonnes. Tonnage commitments can be decreased before July 31, 2007 for a $15 per transaction administration fee.
Forms
The pricing forms will be available beginning August 1, 2007 for the 2007-08 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 Selecct 11.5 | No. 1 CWRW | Kansas Hard Red Winter |
| CWSWS | No. 1 CWSWS | Chicago Soft Red Winter |
Cash spreads for all other deliverable wheat grades will be posted during the pricing period beginning August 1, 2007, and are locked in on the date of initial payment settlement.
Pricing period
Producers can price their DPCs from August 1, 2007, until July 31, 2008. 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, 2008 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, 2007 until July 31, 2008, 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 2006-07 harvest to storage against 2006-07 delivery
calls, you can price this grain using the 2007-08 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, 2007 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, 2008. Any unpriced tonnage will be automatically priced by the CWB on this date. Contracts that are not fully delivered by July 31, 2008 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:
- Assign the contract to another producer. A $15 per transaction administration fee will be assessed to the original contract holder.
- 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.
2007-08 Daily Price Contract
User guide
- Complete guide
(PDF format 1.3 MB) - Introduction
(PDF format 374 KB) - Part 1 - DPC contract details
(PDF format 432 KB) - Part 2 - Contractual obligations
(PDF format 260 KB) - Part 3 - Pricing schedule and forms
(PDF format 650 KB) - Part 4 - Contract transactions
(PDF format 168 KB) - Part 5 - Transaction correction and program termination
(PDF format 168 KB) - Part 6 - DPC delivery and settlement
(PDF format 168 KB) - Part 7 - Marketing strategies
(PDF format 168 KB) - Part 8 - Glossary
(PDF format 142 KB)
Worksheets
- Wheat
(PDF format 187 KB)
Information sheets
- PPO contract assignments
(PDF format 44 KB)