The Canadian Wheat Board prides itself on aggressively demanding high prices from buyers but being restrained in how it hedges those sales once they’re on the books.
However, in late 2007, like many farmers and using the same logic promoted by farm advisers across North America, the wheat board moved quickly to lock up high-priced wheat and barley sales, weeks or months before it had planned to do so.
Unfortunately, as many farmers discovered last year, 2007-08 was a year that could make them look a little foolish for making what had seemed like no-brainer decisions at the time.
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“Just like a lot of producers, when the values were coming up through the $6 and $7 per bushel area, we too thought that those were good values to be pricing at, and we used some discretion to take more of those values than what our straight, average benchmark would take,” said chief executive officer Ian White during a presentation to the Western Canadian Wheat Growers Association annual convention in Winnipeg.
“There’s opportunity associated with taking more or less of those values, and of course none of us knew where those futures levels would eventually get to.”
Eventually, Minneapolis hard red spring wheat peaked at around $16 per bu., far above the $8.50 that farmers in central Saskatchewan received for their quality wheat.
It should be said that few farmers were able to sell much wheat at anywhere near $16 because those prices only lasted a moment. Indeed, one reason the market spiked so dramatically was that almost all available wheat in the hands of U.S. farmers had been priced below $7 per bu.
However, last year was still an example of how even cautious marketers can be caught out by a rapidly rising market. That was just one of the examples White gave the wheat growers association about what it was like for the CWB to market grain in the most volatile year in decades.
In general, the CWB’s restrained hedging approach – not taking speculative positions – paid off.
“These are fairly unemotional, fairly bland types of hedging principles, but I think after a fairly long period of time, whilst you can always argue with the methodologies, they have withstood the test of time,” White said.
His comments underscored a difference between the board’s and some grain and trading companies’ hedging activities.
In the past, the board has mainly only hedged the elements of signed sales, rather than taking aggressive positions locking in values for unsold crop, currency conversion effects or for costs in the export channel.
Some grain companies, on the other hand, take speculative gambles on where they think the markets are going.
With markets so volatile, the board’s relatively unexposed hedging position did not leave it with any derivatives disasters to deal with.
It did, however, have a number of problems with running its producer pricing options, which are programs that synthesize open market prices for some wheat board grain.
The board thought its hedging program to protect it from losses caused by the PPOs was well designed, but it had not anticipated a year as volatile as 2007-08.
A massive inverse in the market, with nearby futures prices rising above further-out months, caused the hedging program to suffer losses.
“We recognized that through that time, the way we had been managing those PPO products internally left us with some issues,” said White, noting the hedging program has been reformed to account for years such as 2007-08.
“Whilst we probably don’t expect to see such a move again in anywhere near the near-term future, we would be ready for those if they occurred.”
While the market volatility devastated some grain traders and shipping companies, the CWB has found that its safe sailing through the year now leaves it in a good position to use a suddenly much more valuable competitive advantage: finance.
The wheat board can borrow money for its operations and sales – up to $2 billion in some years – at the federal government’s AAA credit rating. In the middle of a credit freeze, that’s a great asset.
