Farmers with a Canadian Wheat Board basis contract could have locked in
a farmgate price of more than $7 a bushel for top quality wheat last
week.
All 50 of them.
That’s how many farmers signed up for CWB basis contacts for the
2002-03 crop year.
“It’s minimal participation,” said Garry Pichlyk, the board’s director
of producer services. “It’s not the level that we expected.”
Those 50 farmers, who took out 67 contracts for 11,500 tonnes of wheat,
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represent about 0.05 percent of the roughly 91,000 CWB permit book
holders.
The previous year, 380 farmers took out 550 basis contracts for 91,000
tonnes.
Some critics say the low participation reflects shortcomings in the
basis contract program, which they describe as complicated, unwieldy
and inaccessible.
“The numbers speak for themselves,” said farmer Leo Meyer from Woking,
Alta. “The contracts have to be made more simple and easier to
understand.”
CWB officials say the low participation is due to several factors: a
flat wheat market the last couple of years dampened interest in the
basis contact; this summer’s drought made farmers less likely to take
part; and the majority of farmers prefer to use price pooling as their
risk management tool.
Wheat board chair Ken Ritter said the board has done everything it can
to educate farmers about how to use the basis contract and, at the end
of the day, it’s up to them to participate.
“Our goal is to provide alternative pricing services to producers,” he
said.
“It really doesn’t matter to us whether they use them.”
The basis contract allows farmers to lock in a price that reflects the
difference, or basis, between the fixed price that the CWB announces
daily and the relevant U.S. futures price for the class of wheat they
want to deliver.
For example, a farmer could have locked in a basis of $24.72 a tonne on
Canada western red spring wheat in May or June.
On Sept. 12, the December futures price on the Minneapolis Grain
Exchange was $285.77 a tonne for high quality wheat.
If the farmer decided to lock in the December futures price, he would
receive within 10 days of delivery a price of $310.29 a tonne ($285.77
plus $24.72), less a CWB risk discount of a few dollars.
Assuming local freight and handling deductions of $50 a tonne and a
risk a discount of $3 a tonne, that works out to a farmgate price of
around $257.29 a tonne (slightly more than $7 a bushel) for 1 CWRS 13.5
percent protein. For higher protein, the price would be higher.
Charlie Pearson, a market analyst with Alberta Agriculture, said more
needs to be done to educate farmers about how to use the various risk
management tools available, including the board’s pricing options.
He said participation in the basis contract was hurt by the fluctuation
in basis levels during the sign-up period this summer, which ranged
from a high of $24.72 to a low of $2.30 a tonne.
Ritter said he expects there could be more interest in the basis
contract next year, due in part to a more volatile world wheat market
and to coffee row chatter.
“Nothing sells a program better than to find out that your neighbour
got an extra dollar per bushel for his wheat,” he said.
While farmers can no longer sign up for basis or fixed price contracts,
they can take part in the early payment option program to improve their
cash flow.
It allows farmers to receive immediate payment of 90 percent of the
current pool return outlook (less risk and administration charges of a
few dollars) and still be eligible for adjustment or final payments
from the pool accounts.
Based on the current PRO of $259 a tonne for 1 CWRS 13.5 percent
protein, a CWB discount of $3.50 and freight and handling deductions of
$50, that works out to a farmgate price of $179.60 a tonne, or $4.89 a
bu.
“If you have any outstanding debt you have an opportunity to repay it
quicker and save interest,” said Pichlyk.
As of last week, 210 producers had taken out 220 EPO contracts covering
about 37,000 tonnes.
