CWB Offers Spot Price Option

WINNIPEG - Feb 15/05 - SNS -- The Canadian Wheat Board will offer western Canadian wheat producers the option of delivering wheat under a Daily Price Contract (DPC) based on U.S. cash market bids.

The DPC will be available as a limited pilot program in the 2005-06 crop year (August 1, 2005 to July 31, 2006), with farmers able to sign-up tonnage from June 1 to July 22, 2005. The program will be limited to a maximum tonnage of 500,000 metric ton (MT) during the first year. The CWB will begin posting a daily cash price on June 1 to help farmers become familiar with the program and farmers can begin pricing their wheat under the program on August 2, 2005.

"The daily price will be derived from a basket of elevator points south of the border and will be posted daily by the CWB as a cash price per tonne or bushel," said CWB President and CEO Adrian Measner. "As with the Fixed Price and Basis Payments contracts, this grain will continue to be marketed through the CWB."

The DPC will also make it easier for individual farmers to market niche and high-value products such as organic grain, Measner asserted, as U.S. prices are currently used by the CWB to determine the price of Producer Direct Sales contracts.

What is the Daily Price Contract (DPC)?

The DPC is the fourth Producer Payment Option (PPO) created by the CWB to provide Prairie farmers with an additional option for the pricing of their grain. The other PPOs are the Early Payment Option (EPO), Fixed Price Contract (FPC) and Basis Payment Contract (BPC).

The DPC price will be available daily and will reflect U.S. cash prices.

The DPC will provide farmers with another choice when it comes to pricing their grain.

How will the DPC affect the pool accounts?

Like all PPOs, the DPC has been designed to be neutral to the pool accounts. With a July 22 sign-up deadline the CWB has ensured that appropriate risk management measures can be taken.

Farmers who participate in DPC/BPC/FPC contracts determine their prices outside of the pools. Risk management tools used by the CWB, combined with a contingency fund, backstop these payments to producers. Pool accounts are not affected by any PPO contracts.

Why would farmers want to use the DPC?

The DPC enables farmers who so choose to price their wheat (in 2005-06, the DPC will only be available on the seven classes of non-durum wheat) at prices that will reflect cash values at U.S. elevators.

These prices will be posted daily and farmers can choose the available market value they want to sell their grain at. It is important to note that daily cash prices, by their nature, will be more volatile than the FPC and BPC contract values.

For farmers who aren't located close to the U.S. border, the program will provide them with the option to pursue similar values at their local elevators. Unlike the ability to deliver to U.S. elevator points, farmers further from the border can also benefit from this program.

What impact does this new PPO have on the Producer Direct Sales (PDS) program?

The PDS is based on the price that the CWB would sell a specific grade of wheat at in the U.S. market. Since both the DPC and PDS are based on U.S. market values, they will track each other closely. Therefore a farmer wishing to complete a PDS can use the DPC to lock in the spread he or she will have to pay to the CWB.

How can farmers sign up for a DPC?

Farmers who want to participate in the DPC must sign contracts committing tonnage by July 22, 2005. Sign-up begins June 1, 2005, when pricing information will also become available to enable farmers to familiarize themselves with the pricing relationships under this program.

Why is the sign-up deadline July 22?

There are a number of reasons for this sign-up deadline. In order to manage risk the CWB has to know, in advance of the start of the pool, how many tons need to be hedged to protect the pool accounts and prevent a shortfall. The DPC is priced independently of the pool account. Therefore there will be times when the DPC price is above the pool and other times when it will be below the pool return. Without a sign-up deadline prior to the start of the pool, hedging would not be effective and the pool return could be diluted.

What if a farmer cannot fulfill the terms of the contract?

Farmers can opt out of these contracts up to the July 22 sign-up deadline for a $15 administration fee. After the start of the crop year, the farmer will be subject to pricing damages similar to the FPC/BPC contracts. Pricing damages will be the greater of the cash price change or futures losses, plus the $15 administration fee.