The market is telling wheat growers to sell some of their 2006 crop under the Canadian Wheat Board’s fixed price contract, say grain analysts.
The first Pool Return Outlook for 2006-07 for No. 1, 13.5 percent protein, hard red spring wheat is $202 a tonne, basis export position.
Meanwhile, the board’s fixed price and basis contracts are higher at $206.39 a tonne. The December 2006 basis is $22.96 and the March 2007 basis is $20.90 a tonne.
Under the fixed price contracts, farmers can choose to lock in either the price, which they would do if they thought the market was at a high for the year, or the basis, if they thought prices would increase later in the year.
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Brenda Tjaden-Lepp, an analyst with FarmLink Marketing Solutions of Winnipeg, said that spread between the PRO and the contract price is a signal to sell some wheat outside the board’s pool accounts.
“If the FPC is higher than the PRO, that’s the board telling you, ‘I’ll give you more cash today than I think I’ll be able to get through the pool,’ ” she said.
When that’s combined with significant savings in carrying charges associated with faster payments under the contracts, the message is even clearer.
“If you take those savings, which can be around $3 to $5 a tonne, and add it on to the premium of the FPC over the PRO, you get a real strong signal to sell some wheat under the FPC,” she said.
Tjaden-Lepp said producers should think about locking in around 20 percent of their expected production to generate early cash flow. That’s about equal to the amount the board usually calls for off the combine, thus providing the farmer with a good cash marketing option.
She added producers could also consider re-directing uncommitted old crop wheat to the new-crop FPC.
Charlie Pearson, a grain market analyst with Alberta Agriculture, also thinks producers should lock in a price for at least some of their 2006 crop.
“For that first 10 percent or so, it’s probably not a bad idea to capture some of the current rally by locking in a futures price and letting your basis ride,” he said.
U.S. wheat markets have been climbing steadily in recent weeks in response to continuing dry conditions in Texas and Oklahoma, home to significant hard red winter wheat crops, although prices weakened early this week on forecasts of light rain later in the week.
Despite the rally, the board’s first 2006-07 wheat PRO is lower than 2005-06 for quality, high protein wheat, due in significant measure to the appreciation of the Canadian dollar against its U.S. counterpart, which reduces the price in Canadian dollars.
From Jan. 3 to March 3, the hard spring wheat contract on the Minneapolis exchange has risen about six percent. The Canadian dollar has appreciated two percent against the American dollar in the same period.
Analysts agreed not too much should be read into the first PRO of the year, given all the unknowns about crop production in the coming year.
Larry Weber of Weber Commodities in Saskatoon said because of that, it’s a little early for farmers to be making pricing decisions.
Producers should watch the weather in the United States and the extent of possible drought, which so far has been centred on Texas and Oklahoma. If the situation worsens and widens, affecting key producer Kansas, wheat prices could continue to rise.
“If it stays dry in the U.S. Midwest and the red winter regions, wheat could pull us out of the doldrums,” said Weber.
Tjaden-Lepp said continued dryness in the U.S. would extend the amount of time that the board has to put sales on the books at current price levels.
Weber suggested the board must do more in terms of risk management to protect against the impact of fluctuating exchange rates.
“You look at any other companies that trade in U.S. and Canadian dollars, they seem to have better risk management in place,” said Weber. “They (the CWB) seem to do nothing.”
A CWB spokesperson said that’s not the case, that the agency is aware of the impact of currency values and puts a lot of energy into hedging throughout the year to manage that risk.
“We think our hedging program has protected pool values from the full market impact of Canadian dollar appreciation, especially during the recent steep rise in the dollar,” said Maureen Fitzhenry.
