In the past year, the Canadian Wheat Board earned farmers their second-highest returns in the board’s history.
But rather than celebrating, the board has spent much of its time explaining its steadily declining price outlook. Historically speaking, the returns are good, but compared to its own expectations last fall, they are a big disappointment.
Last October, the board predicted farmers would earn about $310 per tonne at export position for No. 1 Canada Western Red Spring Wheat, but by May it had downgraded its expectations by about $50 per tonne.
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At their end of crop year news conference, board officials said they were no different than other wheat exporters and traders in the world market. No one predicted prices would steadily drop.
But some analysts believe the wheat board needs to rethink its risk management strategy so farmers don’t face this problem again.
“There’s definitely room for im-provement on the risk management side,” said farm marketing adviser Errol Anderson of Pro Market Communications. He said many farmers relied on the wheat board’s Pool Return Outlooks to do their financial planning, and the PROs’ precipitous declines shook many who thought PRO prices wouldn’t be volatile.
“The farmer gets caught on a bit of a whipping spoon, and they go way up but then get shot right down again,” Anderson said.
Wheat market analyst Bill Tierney of Kansas State University said the wheat board may be acting too conservatively in its risk management strategy, creating a large price risk.
“Why wasn’t the foreign currency risk hedged and why wasn’t the wheat price hedged?” Tierney said.
“Was it a problem of analysis and execution, or was it a problem that they never had the authority (to hedge unsold wheat)?”
The board generally hedges only the price and currency rate for sales it has already made. It does not generally use futures or options contracts to protect the price or currency exchange rate of grain that it has not yet sold, although it has the power to do so.
Wheat board chief executive officer Adrian Measner said the board does not play the market.
“We don’t speculate on the market, but try to spread sales out through the year on a consistent, long-term basis so that the risk for the farmer is managed.”
Anderson said that approach is price averaging, not risk management.
Measner said no one can predict when prices have peaked, so locking in prices is simply speculation.
Board chair Ken Ritter agreed.
“It’s often difficult to predict exactly when to pull the trigger with that kind of a mechanism for risk management,” Ritter said.
In hindsight, locking in prices and currency exchange rates in October or November would have given farmers more money than they will now get when the 2002-03 pool accounts are wound up.
But Ritter said if that had been done in 1995-96, when wheat prices also spiked, farmers would have lost millions of dollars in potential returns.
In 2002-03, prices spiked at harvest and declined steadily over the winter, so ending prices look a lot worse than the board had predicted.
But in 1995-96, prices slowly rose over the winter and suddenly peaked in April and May, making ending prices much better than the board had predicted.
Ritter said the same applies to currency risk. Farmers lost millions of dollars this year because the board did not lock in exchange rates to cover future sales, but “what would have happened if it had gone the other way?”
Anderson said the board may consider itself to be avoiding speculation by not hedging unsold grain, but by issuing PROs and not hedging grain, the board is gambling.
“They are huge speculators in the market,” he said. “That’s the irony of their situation.”
Tierney said most big commercial grain users hedge commodity prices and exchange rates, and the wheat board should consider doing the same.
Measner noted that many players in the grain industry follow a similar strategy to the board’s.
Japanese buyers tend to buy grain on a monthly basis, knowing they will occasionally have to pay high prices but also knowing they will benefit from dips in the market.
And he said the board’s strategy is similar to that suggested by many advisers for non-board grains: spread out sales over the year to keep cash flowing and to ensure peak prices are not missed.
Many farmers are disappointed that most board wheat PROs have dropped to the initials level, which means they won’t get interim or final payments, but in other years they have ended up with more money in their pockets than they expected.
This was just a bad year.
“In one year (an aggressive hedging strategy) would have looked good, but in another year it would have been a disaster,” Measner said.
