The Canadian Wheat Board (CWB) today launched a producer payment option for organic farmers that makes it simpler for them to sell their wheat and durum. The Organic Spread Contract (OSC) lets organic farmers settle a final spread price with the CWB at the time of sale rather than waiting for final pool returns. The spread price will be fixed on the same day they arrange a Producer Direct Sale (PDS), thereby reducing the uncertainty associated with selling organic grain.

"Before today's announcement, organic farmers paid the spread between the initial payment and the PDS price," said Rod Flaman, elected director who farms near Edenwold, Saskatchewan. "Then they waited for pool returns to be finalized to determine their final settlement. Now organic farmers can pay one flat spread price on the day they arrange a direct sale and after that, further payment to the pool is unnecessary."

Under the new OSC, organic farmers who market their own grain pay the CWB pool accounts the difference between the PDS price and the daily cash price. Beyond this, an administrative fee will be the only other cost associated with the program.

"As a board we are committed to providing farmers with as many options as practical to meet their individual business needs," Flaman said. "As an organic farmer, I see this one-stop service as another example of farmer focus at work in the CWB."

Flaman noted, however, that as a director he is ineligible for any of the producer payment options.

The OSC will be available as a pilot program in the 2005-06 crop year (August 1, 2005 to July 31, 2006), with farmers able to sign up tonnage from June 1 to July 22, 2005. There is no limit to the sign-up for the first year.

The CWB will begin posting a daily cash price on June 1 to help organic farmers become familiar with the program. Farmers can begin pricing their wheat under the program on August 2, 2005.

Recognizing the strong support pooling continues to receive from producers across the Prairies, the OSC has been designed to be revenue neutral to the pool accounts, as is the case with all other pricing options, Flaman noted.

A backgrounder answering questions about how the OSC will work and an example of how a farmer can use the program is attached to this release.

Controlled by western Canadian farmers, the CWB is the largest wheat and barley marketer in the world. As one of Canada's biggest exporters, the Winnipeg-based company sells grain to more than 70 countries and returns all sales revenue, less marketing costs, to Prairie farmers.

BACKGROUNDER

Organic Spread Contract Q + A

What is the Organic Spread Contract (OSC)?
The OSC is a Producer Payment Option (PPO) created by the CWB to make it easier for organic Prairie farmers to independently market their grain.

The Organic Spread Contract enables organic farmers to settle a final spread price with the CWB at the time of sale rather than waiting for final pool returns. The spread price will be fixed on the same day they arrange their sale.

Previously, organic farmers who marketed their own grain using the PDS paid the spread between the initial payment and the Producer Direct Sale price. They then waited for adjustment, interim and final CWB payments for the full transaction cost to be finalized.

Now organic farmers can pay one flat spread price on a day of their choosing and there are no further payments to the pool.

What is a Producer Direct Sale?
A Producer Direct Sale (PDS) is an option available to western Canadian farmers who want to sell their wheat and barley directly to customers. Both the PDS and OSC transactions let organic farmers to pursue price premiums they may be able to independently negotiate with their buyer.

The PDS price for a given market is essentially the price the CWB would offer to grain buyers in that market on a given day.

When conducting a PDS, the CWB quotes what it is getting for a similar product in a particular market on a given day (known as the PDS price). Under the OSC program, farmers commit tonnage to the program, then on the day of sale, they pay the difference between the PDS price and the daily price posted for the Daily Price Contract to the CWB pool accounts.

If they choose, they still have the option of using other PPOs or doing the regular PDS for grain they have not committed to the OSC. (Farmers can also deliver directly to CWB accredited handlers of organic grain without going through these direct marketing programs).

How will the OSC affect the pool accounts?
Like all PPOs, the OSC has been designed to be neutral to the pool accounts. With a July 22 sign-up deadline the CWB has ensured that appropriate risk management measures can be taken.

Farmers who participate in PPOs such as the OSC/DPC or BPC/FPC contracts determine their prices outside of the pools. Risk management tools used by the CWB, combined with a contingency fund, backstop these payments to producers. Pool accounts are not affected by any PPO contracts.

How can farmers sign up for an OSC?
Farmers who want to participate in the OSC can sign contracts committing tonnage by the July 22, 2005 deadline. Sign-up begins June 1, 2005, when pricing information will also become available to enable farmers to familiarize themselves with the pricing relationships under this program. Administration fees will be associated with the program and are based on the types of transactions being serviced.

Why is the sign-up deadline July 22?
Without a sign-up deadline for both the Organic Spread Contract and the Daily Price Contract prior to the start of the pool year, hedging would not be effective and the pool return could be diluted.

What if a farmer cannot fulfil the terms of the contract?
Organic farmers will have until October 31 to reduce their tonnage commitment by up to 40 per cent without penalty.

Farmers can opt out of these contracts up to the July 22 sign-up deadline for a $15 administration fee. After the start of the crop year, if farmers cancel contracts they will be subject to damages paid to the CWB to offset the CWB's losses.

Example of the OSC at work:

The Organic Spread Contract (OSC) uses the Daily Price Contract (DPC) values along with the Producer Direct Sale (PDS) value on a given day to establish a spread for organic producers when executing a sale with their end user. The following scenario is an example of how the OSC might work. All figures are presented for the purpose of illustration only.

On July 15, 2005, Farmer Bob contacts the CWB to register 100 tonnes of CWRS organic wheat to the OSC program. When the wheat is harvested, he plans to pursue a marketing opportunity with a U.S. buyer and commits the majority of his anticipated production to the OSC program based on his average yields. He also takes into consideration 40 per cent reduction option when making his initial tonnage commitment knowing that he can adjust his OSC tonnage commitment to his actual production.

On December 1, 2005, Bob confirms his 100 tonne No. 1 CWRS 12.0 organic sale with his U.S. buyer and calls the CWB to lock in the OSC spread on his tonnage commitment.

The DPC value is $225 per tonne (No. 1 CWRS 13.5 reference grade value of $235 and cash spread discount of $10 per tonne for No. 1 CWRS 12.0). The U.S. PDS value is $230 for No. 1 CWRS 12.0 on this day.

Summary of Bob's OSC spread lock in on December 1:

Bob's net payment is therefore $500 ($5 OSC spread x 100 tonnes) plus administration by using the OSC to finalize his costs. Bob will be issued his export licence and can now deliver to his U.S. buyer.