Let’s go back a bit and look at how the producer payment options (PPOs) came about. The short version is that farmers were asking for more control over pricing their wheat sold through the CWB, as opposed to having to stay in the pool. With market fluctuations and futures markets becoming more active due to greater speculative activity some farmers felt they were missing opportunities to lock in higher values for their grain when markets rallied and wanted the ability to be able to do that.
Enter the CWB’s response — the Fixed Price Contract (FPC) and the Basis Price Contract (BPC).
Through the FPC, farmers can lock in a fixed price for their grain based on the daily futures market values of the U.S. wheat futures markets. Each class of wheat in Western Canada is priced against one of the three different wheat futures markets in the U.S. based on quality specs compared to U.S. wheat varieties.
Canadian Western Red Spring wheat (CWRS) is priced against the Minneapolis Wheat futures, which trades the higher-quality milling U.S. Dark Northern Spring wheat. Canada Prairie Spring wheat (CPS) is priced on the Kansas Wheat futures as that is where the majority of the mid-range, lower-quality U.S. winter wheats are traded, and Soft White Spring wheat (SWS) is traded off of the Chicago Wheat futures in comparison to the lower quality primarily U.S. soft red, white or feed wheat.
For each of the different classes of wheat there is a base grade that you are contracting when you use the PPOs. For CWRS it is a No. 1, 13.5 per cent protein CWRS, For CPS it is a No. 1. CPS.
If you do not have that quality at harvest time then you would just take the initial price discount (pre set by the CWB) for the grade you end up delivering and you have fulfilled your contract commitments. If your grain ends up being graded feed there may be a further discount depending on what the current world feed market values are. That discount can change daily depending on the markets and will be locked in the day you accept payment from the elevator for the grain you deliver.
The most important thing to remember is that if you use the FPC or BPC the price you lock in is the price you will get for your grain. You are no longer in the pool. If at the end of the year the pool value ends up being higher than the FPC or BPC value you locked in you will not get a top up for the value difference.
The difference between the FPC and BPC is that the BPC gives you the ability to lock in either the futures or the basis portion of the pricing contract first and then do the other at a later date. With the FPC you lock in both the futures and basis together so you have set a fixed price for you grain and you are done with that contract.
CHOOSING ONE OVER THE OTHER
Why would you use one over the other? That depends. Good answer, huh? The choice you make depends on what you think the markets are gong to do over the next few months.
If you think the markets are going to fall and you want to secure the current price based off of the U.S. futures, then you want to lock in the futures sooner than later.
Next you need to try to determine if you think the basis portion of the contract is going to widen or narrow to your advantage. This is not easy. There are a lot of factors that impact the basis — market volatility, amount of grain sold for the year by the CWB, the Canadian dollar and forecasted world grain market values into the future all play a role.
Once you develop on opinion on what the futures markets are going to do and once you predict what the basis is going to do the decision becomes much clearer. If the futures are going to fall and you think the basis is going to widen out against you then you want to lock in both components of the contract together on the FPC.
If, however, you think the futures are going to continue to improve but you think the basis may adjust against you, then you would use the BPC and lock in the basis now. Then you’ll have to wait and watch the futures markets and lock the futures in at a later date when (you hope) it has gone higher. Or, you may think the futures won’t go any higher but you believe the basis will adjust to your advantage, then you would use the BPC to lock in the futures only for now and wait and watch to see if the basis adjusts to your favour.
BrianWittalhas30yearsofgrainindustry experience,andcurrentlyoffersmarket planningandmarketingadvicetofarmers throughhiscompanyProComMarketingLtd. ( www.procommarketingltd.com)