While not all farmers plan to use the CWB once it no longer has a monopoly, there may be some pricing benefits
The new CWB has the potential to fill a very important niche in a farmer’s wheat marketing toolbox. If used properly, the CWB will be able to effectively play the role of a farmer’s personal hedge account.
Uncertain basis levels and quality discounts allow a wheat marketer to make the case that if a farmer wants to forward sell grain, selling futures is currently the best option.
In the past there have been two ways to accomplish this strategy:
(1) The first way to forward sell futures is to open a futures account and manage your own position and margin calls. This strategy is limited in popularity because most farmers are not set up financially and psychologically to get into the market. However, this strategy offers the most flexibility, because it allows the opportunity to deliver the physical grain to the company with the best cash price for the grade grown, while still protecting futures prices through the futures market.
(2) The second way is to sign a hedge-to-arrive (HTA) contract with a grain company which allows you to sell futures and then lock in the basis and grade discounts at a later date. This strategy takes the hedge out of your own account and passes margin calls onto the grain company. Although this hedge will allow for basis changes, it will not allow you to change where your grain is going to be delivered.
The new CWB offers a hybrid approach that combines these first two options into a “best of both worlds” option. A farmer could take a HTA contract with the CWB.This HTA contract allows delivery point flexibility, but leaves the financial complications of having a futures account to someone else.
Editor’s note: Daniel Holman originally sent this piece out to clients at the North West Terminal at Unity, Saskatchewan. It is reprinted here with permission. †