Volatility in the futures market has claimed another victim.
The Canadian Wheat Board has terminated parts of its early payment options (EPO) program.
Mel Pawlyk, the wheat board’s manager of producer payment options, said changes in the market had increased EPO discounts to a level that has almost eliminated value for producers.
“The value of the EPO is gone as a cash flow tool and as a floor price,” he said.
All EPOs had been terminated as of Oct. 27, with three exceptions:
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- The 80 percent EPO for No. 4 CWAD.
- The 90 percent EPO for red spring and hard white wheat, the top four grades of durum and designated two-row and six-row barley.
- The 100 percent EPO for red spring, hard white, Canada prairie spring, the top four grades of durum and two-row and six-row designated barley.
The EPO is intended to improve farmers’ cash flow by providing early payment of a guaranteed floor price based on a percentage (80, 90 or 100) of the Pool Return Outlook.
Participants receive that amount, less a discount reflecting the risk to the board of guaranteeing early payment, the time value of money and administration.
Recent volatility in the futures market, along with the fact PROs at this time of year are based on a small volume of actual sales, has resulted in sizable discounts.
The program uses a put-option strategy to secure the floor payment, and Pawlyk said those options are not cheap in a volatile market. That means a higher discount and less value for farmers.
“You’re paying up to $40 or $50 a tonne discount and locking in a floor price that’s maybe only $15 or $20 above the initial.”
In some cases, he added, the EPO after the discount is barely at the level of the initial payment.
The board will evaluate discount levels on an ongoing basis to determine future offers under the EPO.
