FOREIGN COUNTRIES' POLICIES AND PROGRAMS
Canadian Wheat Board Announces New Payment Options
On March 1, 2000 the Canadian Wheat Board (CWB) announced new payment options. The CWB is currently transitioning its payment practices from one which was restricted to only the pool returns to one which provides Canadian farmers with additional pricing options. The new pricing options, both based off of the idea of a Fixed Price Contract (FPC) were created in hopes of addressing farmers' requests for greater price flexibility to manage cash flow for their farming business. There are two components available to farmers in the Fixed Price Contract. They can lock in a fixed price for a given quantity of Canadian Western Red Spring (CWRS) wheat based on the CWBs Pool Return Outlook (PRO), or they can lock in a basis over the Minneapolis Grain Exchange futures price and later lock in a futures price prior to delivery. The CWB price pooling system still remains an option for farmers who do not want to use the FPC and will continue to provide farmers with pooled payments for grain marketed by the Board under the old system.
How do the new pricing options
The New System of Delivery and Payments to Canadian farmers
With the announcement of the CWB PRO beginning in April 2000 and then every month up to and including July 2000, the CWB will announce a fixed price and a basis for farmers who want to lock in a price for their CWRS wheat. The fixed price is defined as the midpoint of the PRO with a discount for risk, time value of money and administration. The basis is defined as the difference between the fixed price and the Minneapolis futures price (December or March). The futures price can be locked in at a later date, but must be locked in prior to settlement or prior to the basis price expiry date.
Farmers can sign up for their fixed price or basis on the day of the PRO announcement and every day thereafter for up to four business days. In the 2000-2001 crop year, the Fixed Price Contract will be available for CWRS wheat only. Together with farmers, the CWB will consider enhancements to the program in future years.
The following are steps Canadian
farmers must take in order to deliver and receive payment(s)
under the new Fixed Price Contract options.
Farmers are to deliver their FPC
wheat using acreage-based delivery calls and contract delivery
calls. If required and if they have exhausted all delivery
opportunities available to them, additional opportunity will be
provided by the end of the crop year to allow farmers to fulfill
their FPC obligations.
1. Farmers need to select a fixed price or basis for No. 1 CWRS 13.5% protein when prices are announced on the fourth Thursday of each month beginning April 2000 up to and including July 2000. The fixed price and basis will be available for up to five business days unless it is revoked for market reasons.
2. If farmers choose the Fixed Price:
a. They will receive the initial payment for the grade delivered, then a FPC payment from the CWB within 10 days representing the difference between the FPC price and the initial payment for No. 1 CWRS, 13.5% protein at the time of settlement and minus deductions required by the CWB Act or other laws.
b. This is full payment for the wheat and there are no further payments.
3. If farmers choose the Basis Price:
a. Farmers must lock in the futures price prior to taking settlement for the delivery or prior to the basis price expiry date. The December futures apply to the April and May basis, and the March futures apply to the June and July basis. Expiry dates are November 29, 2000 for December futures and February 27, 2001 for March futures.
b. Farmers must lock in the futures price by contacting the CWB specifying an FPC contract number. There are strict time deadlines to follow in order to lock in the futures price of choice.
c. If farmers do not lock in a futures price before taking settlement for delivery, the locked in price will be the futures price in effect at the time that the settlement is processed by the CWB. If the futures price is not locked in prior to the expiry date, the locked in price will be the futures price in effect on the expiry date.
d. Farmers will receive the initial payment for the grade delivered, then a FPC payment from the CWB within 10 days. This payment represents the difference between basis plus the futures price, less the initial payment, and minus deductions required by the CWB Act or other laws.
e. This is full payment for the wheat and there are no further payments.
The payment will include an amount to compensate farmers for wheat delivered in later months of the crop year. The amount applies to the months of December through February and then increases for the periods of March through April and May through July.
FPC Pricing Examples:
(Examples are in Canadian Dollars)
These examples show the transaction for a farmer who delivered and took payment for various grades and protein of CWRS wheat under a Fixed Price Contract.
|Grade delivered||FPC price||Initial Payment*||FPC Payment**||Total Realized price to farmer|
|No. 1 CWRS 13.5%||$202||$154||$46||$202|
|No. 1 CWRS 14.0%||$169||$46||$215|
|No. 2 CWRS 13.5%||$153||$46||$199|
In this example:
Below is an example of a farmer who locked in a basis for CWRS wheat, and then committed to a futures price prior to taking settlement for deliveries under an FPC.
|April 27th Sign-up||Farmer Prices June 1, 2000||Farmer Prices August 1, 2000|
|CWB FPC Price #1 CWRS Wheat 13.5%||$202|
|Minneapolis December Futures||$192||$209||$170|
|CWB Initial Payment #1 CWRS Wheat 13.5%*||$156||$156||$156|
|Total realized payment to the farmer**||$202||$219||$180|
payment is subject to deductions for freight and elevation.
** FPC payments are subject to deductions under the CWB Act or other laws.
In the example above:
|A farmer will lock in a FPC on April 27, 2000|
|The CWB FPC price #1 CWRS wheat 13.5%||$202|
|The Minneapolis December futures at date of sign-up||$192|
|FPC basis||$10 = ($202-$192)|
|#1 CWRS 13.5% initial payment||$156|
|FPC Payment||$46 = ($202-$156)|
|Total realized payment to farmers||$202|
If the farmer delivers in June, the payment structure will look like this:
|June 1, 2000|
|FPC payment||$63 = ($209-$156+10)|
|Total payment to farmers||$219 = ($156+$63)|
If the farmer delivers in August, the payment structure will look like this:
|August 1, 2000|
|FPC payment||$24 = ($170-$156+10)|
|Total payment to farmers||$180 = ($156+$24)|
The CWB states that implementation of the payment options will not have any impact on the CWB pool accounts. A contingency fund will be established for the operation of the Fixed Price Contract. Farmers who use the payment options pay all costs of operating the programs. This contingency fund will be established so that the fixed price program will have no impact upon the pool account. Although a surplus or deficit may occur in a given year, the contingency fund is expected to break even over the long term.
Source: Canadian Wheat Board (www.cwb.ca)
For more information, please contact Debbie Seidband at (202) 720-4204
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