Full costs to farmers underestimated
Some years back Co-operator reporter Allan Dawson quoted a farmer saying that basis is a licence to steal. Two March 22 opinions are cases in point where we as farmers take a back seat to the private trade margin traders.
In “The $5-million advantage of local processing,” Manitoba Cattle Enhancement Council’s figures are $130 per animal, including a minimum of $50 for freight as the farm gate difference between Manitoba and Alberta beef. However, without a local processor, the chain store local retail price likely includes a further minimum $50 dead meat reefer freight Alberta back into Manitoba. Why would the MCEC leave this money on the table?
In the letter “Pure luck now the management strategy,” compared to “cash,” the private trade discounts for delivering off-spec contracted canola future deliveries are exceptionally steep.
However, delivering canola according to future delivery contracted specs is child’s play compared to growing and delivering future delivery contracted specs for wheat. Furthermore, the current strike price put options for a November canola is about $27 per tonne, a risk premium that if not factored in, bites rather hard should the crop, without an Act of God clause, not materialize. Selling but a portion lessens that risk, but increases the farmer’s exposure of carrying sunk input costs of unpriced grain into a falling harvest price. In other words, by addressing only the contracted flat price, the letter writer has severely underestimated the full basis risk to farmers.
However the writer’s opinion that farmers who took advantage of the CWB buyback, as “the individual greed incentive to destroy the CWB” is simply untrue and deserves correction. In terms of pricing efficiency, the CWB buyback as a means to arbitrage the board is second to none in the private trade.
Even producer cars provide more basis risk to farmers to arbitrage a segment of the private trade’s supply chain, not to speak of the many ways in which the private trade erects outright obstacles to arbitrage, from buying out the competition to simply suspending a farmer’s right to make delivery against commission house future contracts.
St. Francois Xavier, Man.