Farmers short of crop for Canadian Wheat Board fixed price and basis contracts will not be forced to fill all their delivery obligations.
The CWB board of directors has decided to use financial gains from hedging those contracts to help cover farmers who have no grain of a high-enough quality to cover the contracts they signed.
“We felt as a board, given the kind of year we had, that this was a reasonable way to deal with the issue,” said board chair Ken Ritter.
When farmers sign fixed price and basis contracts, the board hedges its price risk by selling futures contracts on the Minneapolis Grain Exchange. That locks in the price the board needs to pay to the producer on delivery, and the farmer’s grain provides the surety the board needs to be able to offset changes in the futures price.
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The problem this year is that a few farmers were hit so severely by the Aug. 20 frost that they do not have enough high quality wheat to cover the contracts they signed.
But fortunately for the wheat board, most of the contracts were signed by producers when Minneapolis wheat prices were significantly higher than today. That has meant that the wheat board’s futures positions yielded an unexpected profit. Instead of simply hanging on to those futures gains and forcing the unlucky producers to fulfil their contracts, the board has decided to use the money to shore up the accounts.
“This change will enable farmers to benefit from any futures gains, net of basis change, that they may have achieved” on their fixed price or basis price contract, the board said in a News release
news.
Ritter said the board didn’t want to leave frost-damaged farmers in the lurch.
“Rather than put (the hedging profits) in the contingency fund, the board of directors in a sense of reasonable compassion, given this disastrous Aug. 20 frost, thought that it was important that as a one-time only we would make the decision that those farmers receive those gains,” said Ritter.
In most instances the hedging program would not produce gains or produce losses that could only be offset by the physical delivery of the contracted grain, so the board has no intention of making this a policy, Ritter said.
The board may consider adding act of God clauses to its contracts, but has not discussed that yet.
Some grain company contracts contain act of God clauses that save producers who have a crop failure from having to fulfil their contracts. Other contracts force producers to fill their contract regardless of whether they have enough grain to do so, sometimes requiring them to buy expensive grain to replace their lost production.
Alberta Agriculture grain market analyst Charlie Pearson said farmers should talk to wheat board marketing advisers before making any decisions if they are unable to fill their contracts.
They may have a number of options available and “they need to pencil out what works best for them.”
Pearson also wondered if the program shouldn’t be extended to other years in which futures positions are profitable.
