Monday, November 15, 2010

Managing Access to a Voluntary Pool

According to single desk advocates, a problem with a voluntary pool is access.  They fear farmers would try to opt in and out all the time, depending on the price spread to the open market price.

The Initial Basis concept I described in my last commentary goes a long way to solve that issue.  Since the final price of the pool would be variable (like any basis contract), it would remain close to the open market price, providing less incentive to opt in or out.

Beyond that though, all contracts with the CWB should be considered just that – a contract.  Just like with any other grain, pulse or oilseed buyer, sales to the CWB should be considered a firm obligation to deliver.  With the Initial Basis idea, the CWB should treat any defaults like any other buyer would.

For instance, if you wanted to deliver at or near harvest, the CWB could offer a pool with an Initial Basis based on the December futures contract.  For deliveries later in the year, the later pool would have an Initial Basis based on one of March, May or July futures, depending on the delivery period.  This would provide financial incentives to farmers to hold wheat for delivery later.

The different prices of different futures months reflect the relative value of holding grain or moving it.  Farmers are not seeing the benefits of these market signals since they are not used by the CWB in any way right now to manage the flow of grain into the system.  But they could be.

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