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Farmers are struggling with feed wheat cash flows.
Let’s look at the numbers (these are all $/bushel to a farmer in central Sask):
- The Pool Return Outlook (PRO) for CW Feed Wheat is $4.63/bu.
- The Initial Payment for feed wheat is $0.49/bu.
- There is an interim (or adjustment) payment in the works, reportedly in the $50 to $70/tonne range ($1.36 - $1.90/bu) but we don’t know when it will be available; once it is, the Initial will go up to about $2.12/bu.
Delivery and pricing options:
- Pool account: As of Nov 2nd, there is a Series A 25% contract call on feed wheat. (Assuming the CWB will accept 100% of what is offered, this means farmers can deliver 25% of what they offered.)
- Guaranteed Delivery Contracts (GDCs: Similar to the GDCs on feed barley, these are based on company-specific tenders, provide 100% acceptance and delivery in a defined time frame. The tonnage is limited but not made public. Also, the price is not set until the delivery date.
- FlexPro: If you signed up on a FlexPro contract (sign up deadline was July 30, 2010) you can apply feed wheat on your contract but at the prevailing spread to feed wheat from the reference grade on the day of delivery.
- BPC/FPC: If you signed up for a Basis Price Contract (BPC) or a Fixed Price Contract (FPC), you can apply feed wheat on these contracts too. Here too, the discount for feed wheat is the prevailing spread on the delivery date.
- Feed discount: currently $0.55/bu. It changes periodically; it has been as low as $0.35/bu and as high as $0.57/bu.
Cash flow implications:
- Assuming a yield of 40 bu/acre, the most you will be paid right now delivering on the Series A contract call is roughly equal to about $4.90/acre. On a quarter section that works out to about $780 in total.
- Including the pending interim payment, the price on delivery moves up to about $2.12/bu. This works out to $21.20/acre, or about $3,400 per quarter
- FlexPro, BPC or FPC: the price you will receive is based on your contract price and the feed discount on the day of delivery.
- FlexPro: the contract high is $6.88/bu. With a 25% call, this works out to $68.80/acre or about $11,000 per quarter.
- FPC: the contract high is $6.70/bu. This works out to $67/acre or just under $11,000 per quarter.
- To put this in perspective, a rough estimate of cost of production is $32,000 per quarter.
In terms of delivery, GDCs give the best opportunity to deliver – if you can get one. (Even the CWB advises that Series A is a better deal for farmers than the GDCs since not all farmers can participate in the GDCs.) In addition, you don’t know the price until you deliver.
In terms of price, the FlexPro appears to be the best option – but you had to sign up early and delivery is limited to delivery contracts (contract calls).
I can understand why the feed discount moves – the CWB sold milling wheat and now has feed wheat being delivered to it and the spread between milling and feed wheat is variable. What doesn’t make sense is that the CWB will only set the price on the day of delivery. There is no difference to the CWB in terms of risk when pricing feed wheat – they can do it before delivery by the farmer as well as on the day of delivery. In fact, pricing ahead of delivery takes a lot of guess work and risk out of the equation for farmers, particularly when they can sell feed wheat into the non-CWB market.
Is the CWB managing risk to the CWB or risk to the farmer?
Possible solutions include opening up delivery with better premiums for deferred delivery. Some farmers have the financial ability to hold grain in storage and, if appropriately compensated for storing, they will. This will open the door for those that need the cash flow to deliver more wheat without overwhelming the system. This would also mean less canola would need to be sold for cash flow, having a positive impact on canola basis levels.
Regardless of whether you want the status quo, get rid of the single desk or even the whole CWB, the CWB needs to change to put farmers and their business needs front and centre, starting with cash flow. In any language, these programs don’t cut it.
Excellent analysis as usual John. One further point is that the CWB's low price offerings are causing farmers to deliver more wheat into the off-board feed market than would be the case under an open market (i.e. if the CWB were made voluntary). Under an open market more feed wheat would be sold into export markets, and that would help take some pressure off prices in the domestic market. The situation today in feed wheat is parallel to the situation today in feed barley -- the CWB's inability or unwillingness to reflect world prices in its price offerings to farmers artificially depresses domestic feedgrain prices. I suppose that's good news if you're a cattle feeder, but not so much if you're a prairie wheat or barley producer. If CWB directors truly wanted to put the interests of wheat and barley producers first, they'd issue “no cost” export licenses to prairie farmers and grain companies, so that our prices would better reflect world values.
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