In this article we will spend some time going over the risks and rewards of using Canadian Wheat Board (CWB) Producer Payment Options (PPO) contracts. They really aren’t much different than most other grain contracts that you might sign for other crops at the elevator. Put simply, you are locking in a price for a specific grade of grain for future delivery.
One key difference with board PPOs is that there is no specified delivery period attached to the contract as there is when you lock in a contract on canola, for example. The wheat you price will be called for delivery through the traditional acceptance process that the CWB uses with the A and B series delivery contracts, or on guaranteed delivery contracts. It is very important to remember that you still have to sign your tonnes up on a delivery contract after you have priced them on a PPO.
MAKING THE GRADE
For all grain contracts there is a base grade that the contract price is based on. For CWRS that grade is a No. 1, 13.5 per cent protein, for example.
What happens if you don’t make the grade? For easy figuring here is the best way to calculate what you will get paid for the grain you deliver.
Calculate the difference in the initial price of the base grade and what ever the grade is that you deliver. Then you deduct the difference off of your FPC contract price.
For example, let’s say you deliver a No. 3 CWRS 12.5 per cent protein wheat with an initial price of $227.90/t. The price of the base grade (No. 1 CWRS 13.5 per cent) is $274.60/t. The difference is $46.70/t. Now deduct that off of your FPC price, and you will come up with the price per tonne that you will receive for the No. 3 CWRS 12.5 per cent that you delivered. Remember that all CWB contract prices are based delivered to Vancouver so you need to deduct freight and elevation charges for your delivery point off of the FPC value to get an accurate net delivered to the elevator price for your grain.
Why Vancouver? The reason the CWB offers a delivered Vancouver price is because each company and each elevator have a different elevation and freight charge, and elevation charges can change on any given day so it would be impossible to keep track of all the changes.
What this does is allow farmers to negotiate elevation and freight charges with the elevator prior to delivery in an effort to reduce your costs of doing business with them.
Where it changes is if you end up delivering a No. 4 CWRS or feed wheat against an FPC. You will be subject to having to deduct a feed wheat discount off of your contract price along with the initial price spread mentioned above.
The feed wheat discount is calculated on a daily basis and reflects what the value of feed wheat is that the CWB could sell into the export market basis the CWB’s Feed Wheat PRO value. The discount cannot be locked in in advance of delivering the grain. Instead, the discount is locked in the day the elevator cuts you the cheque for the delivered grain and will be deducted from your top-up payment coming from the CWB.
The grade discount process works somewhat the same for canola. If you deliver a No. 3 Canada canola you take whatever the grade discount is between a No. 1 and a No. 3 off the contract price. Because you are dealing direct with the elevator they know their freight and elevation costs and factor that into the basis portion of the pricing contract.
SHORT ON TONNES?
The concern of not being able to deliver against a contract is always something to keep in mind. Buying out a contract to make up for a production shortfall can end up being really expensive if the markets have risen since the time you priced your grain.
It’s your decision as to when to do the buyout. You could wait the entire crop year to do it in hopes that the futures may fall back down. If markets continue to go higher, however, you are on the hook even more, as the contract will automatically be bought out at the end of the crop year (July 31).
The buyout will be made up of a couple of different components: the difference between the current futures value and the futures value you locked in; and, the difference between the current basis and the basis you locked in. If you didn’t lock in the basis yet then the value difference would be zero for this portion of the buyout as the CWB would apply the current basis to your contract and deduct the current basis in the calculation for a net zero.
The difference between the current adjustment factor and the adjustment factor on your contract. If you locked your contract in before August 1 there is no adjustment factor on your contract to have to be concerned with, so again the value difference would be zero for this portion of the buyout as well.
Now, if your contract value is higher than the current market value and the PRO you have two choices:
You can call the CWB and they will close your contract out and there will be a $15 per contract admin fee charged. Or, you can transfer your contract to another farmer so that they can take advantage of the higher price. Again, there will be a $15 per contract admin fee to do the transfer if you choose to go this way.
You can always negotiate with whomever you are going to give the contract to and split the value difference with them so that you are both benefiting from the higher value of the contract, otherwise your only choice is to have the CWB close the contract and no one benefits from the higher value of the contract.
BrianWittalhas30yearsofgrainindustry experience,andcurrentlyoffersmarket planningandmarketingadvicetofarmers throughhiscompanyProComMarketingLtd. ( www.procommarketingltd.com)