Starting Sept. 1, farmers will have the ability to lock in a futures price on wheat a full year before harvest.
That’s one of the additions and adjustments to the Canadian Wheat Board’s menu of producer payment options, or PPOs, announced last week. The board of directors also approved other plans:
- To develop a force majeure, or act of God, clause that would release farmers from contracts in the event of production losses arising from unforeseen events beyond their control.
- To create a full-scale basis payment contract for malting barley, starting Feb. 27, 2006.
- To streamline the administration of PPOs to provide faster payments to farmers.
- To provide greater clarity for farmers about the way basis values are calculated once the crop year has begun.
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CWB chair Ken Ritter said the PPOs offered by the board, including the early payment option, fixed price and basis payment contracts, daily price contracts and guaranteed delivery contract, allow farmers to choose how and when to price their grain.
“The availability of PPOs, in addition to the traditional CWB pool accounts, means producers can take advantage of spot prices and futures markets without eroding the significant benefits they derive from pooled returns and single desk selling,” he said.
“As western Canadian farmers, this gives us the best of both worlds.”
Under the new one-year basis contract, the board will offer the U.S. December futures price in Canadian dollars for each of the seven classes of wheat.
Producers can lock in the futures first and then price their basis starting at the end of February 2007 when the first new-crop pool return outlook is released.
The basis can be locked in between the end of February and the end of October.
Here’s an example of how it might work:
On Nov. 22, 2006, a producer decides the December 2007 Minneapolis red spring wheat futures are trading at favourable values and locks in $215 per tonne using the basis price contract, or BPC.
On Oct. 21, the December basis is $20 per tonne and the producer locks in this value, establishing a price of $235 a tonne for the reference grade No. 1 CWRS 13.5 percent, in-store at terminal position. The farmgate value of the BPC is $185.39 per tonne.
The board says producers can benefit by having more certainty about margins when making seeding plans, taking advantage of futures rallies, locking in foreign exchange rates and managing smaller volumes. The BPC minimum tonnage is 20 tonnes, versus futures contracts of 136 tonnes.
About 16,500 farmers participated in the board’s PPOs in 2004-05. The most popular was the early payment option, used by about 8,700 farmers. Next was the fixed price contract at 5,900, the guaranteed delivery contract at 1,000 and the basis price contract at 900.
So far in 2005-06, basis price contracts are ahead of fixed price, reflecting futures market trends and hopes for a market rally later in the year, said a board spokesperson.
