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Navigating PPOs: Everybody Into The Pool!

PRODUCER PAYMENT OPTIONS

For this instalment of navigating pricing grain through the Canadian Wheat Board (CWB), I’d like to take a look back in time a little and talk about the original producer payment option (PPO) the CWB offered — pool pricing. Then over the next few columns, I want to spend time discussing the other available PPOs and how they relate to or differ from pool pricing, and how you can use them to enhance your marketing of CWB grains. In order to become a better strategic marketer you need to minimize your market exposure risk by maximizing on marketing opportunities. The best way to do this is to have a complete understanding of all the pricing tools available to you and using them when appropriate.

PRICE POOLING

Let’s first jump into the pool. Pool pricing was designed to average out the price of grain sales over a 12-month period in order to provide all farmers with an equal averaged price for their grains sold during that crop year.

The CWB provides monthly pricing estimates in the Pool Return Outlook (PRO) so that farmers have an idea of what their grain will end up being worth for the crop year. The PRO is calculated based on actual sales values to date and forecasted future sales values based on current world market conditions. Monthly PRO updates are critical for keeping farmers up to date

on changing market conditions in an effort to offer marketing intelligence so they can make better marketing decisions. After an initial price at delivery, farmers then receive interim payments throughout the year and then a final payment five to six months (or more) after the crop year is closed.

Farmers uncomfortable using futures, options or forward pricing contracts find pool pricing the way to go. It allows you to wait until you know what you have for quantity and quality of grain before you have to commit to a pricing contract. Pool pricing allows farmers to price average their grain over a 12-month period, and this appeals to many farmers who wish to minimize their pricing risk and not have to worry about watching the markets all year long.

The risk to pool pricing is that the Pool Return Outlook (PRO) value can go down throughout the year, so you could end up taking less for your grain as the year goes on, but conversely you could make more when the PRO values go up as the year goes on.

EARLY PAYMENT OPTIONS

To help address the issue of a falling PRO through the crop year and to enable farmers to lock in a floor price value, the CWB came out with the early payment option (EPO). An EPO is a contract that offers the option of locking in either 80, 90 or 100 per cent of the PRO value as a floor price, eliminating the risk of the PRO falling during the year. A very important thing to remember when you use the EPO is that you remain in the pricing pool — if the PRO value at crop year end finishes above the EPO value you locked in, you still receive the extra value through the final payment.

If you think the PRO value is going to drop over the balance of the crop year you may want to use the 100 per cent EPO to lock in the PRO sooner than later and guarantee yourself a floor price for your grain. Minimizing your pricing risk by guaranteeing a minimum price for yourself is a sound marketing strategy.

There is a premium paid when signing up for an EPO, as the CWB does hedge this contract by purchasing an option to secure the value that you choose to lock in. The premium varies depending on the EPO value you choose to lock in, plus various other market influences that the CWB considers to be pricing risk factors that could influence future PRO values such as world supplies, pricing and other world market factors.

CASH FLOW CONSIDERATIONS

Another part of the EPO contract that is important to remember is that you will get paid more of the value for your grain sooner than if you just delivered into the pool. You get paid the initial price at delivery and then you will get paid the balance difference between the initial price and your EPO value within 14 days. Then, as mentioned earlier, if the PRO ends up higher than your EPO value at the end of the crop year you will be paid that difference in a final payment.

Regardless of the pricing option you choose to price your CWB grains, there is no defined delivery period that you can count on for delivering your grain. Deliveries are based on general delivery calls and the ability of the grain companies to take the grain. This can cause a real cash flow problem for many farmers. Another option would be to consider applying for the interest- free portion of the CWB cash advance immediately after harvest so that you have some cash to pay bills etc. which will help alleviate some of the cash crunch you may experience after harvest.

Depending on the number of acres you farm and the tonnes of grain you produce you could be eligible for up to $100,000 interest free for the crop year. The advance is paid back as you deliver your grain and will be automatically deducted off of your cheque by the grain company you deliver to.

The cash advance application may seem like quite a bit of paperwork, especially if you are incorporated or a partnership, but it is a very good tool that allows farmers to access cash with no interest charges at a time when the majority of you may be maxed out on lines of credit. Any time you can pay off bills without incurring interest costs you are saving money.

BrianWittalhas30yearsofgrainindustry experience,andcurrentlyoffersmarket planningandmarketingadvicetofarmers throughhiscompanyProComMarketingLtd. ( www.procommarketingltd.com)

Farmers

uncomfortable

using futures,

options or forward

pricing contracts

find pool pricing

the way to go

About the author

Columnist

Brian Wittal

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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