Options

[$short]

Has anyone priced out using options to cover the
2012 crop?

Pros:

1. Floor price is set
2. You can capture a price rise in the cash market
3. You aren't tied to delivery point or time
4. Can be used to replace some insurance
5. No margin call

Cons:

1. Basis risk still applies
2. Sept/Nov puts are expensive

Any thoughts?

Just doing some rough math tonight. Assuming
crop insurance production numbers I can come
close to covering the costs for my farm.

If I spend $65,000 on options I insure approx
$1,000,000 worth of production.

[mbratrud]

Yes $short, I do this all the time. I try and do a combination of cash sales and options just to manage the premium.

Look at selling Future only for part if you want to protect todays price. If you want to manage how much cash you lay out in margin, many companies will do Futures first contracts but make sure you pick a delivery month where basis levels will be better like Nov, Dec or Jan.

Just use the options for the portion of your crop that you are not comfortable contracting. For example price your first 10 bushels on Futures first or cahs price, then do your next 10 with options.

Options off the Novemeber futures are thinly traded and quite expensive. Maybe look at how you can use July and that may get you to a point where you are more agronomically more comfortable to make more cash sales.

Another strategy would be to use Soybean Options as a hedge, they are more actively traded and a bit cheaper, but make sure you understand Soybean Canola Spreads and what is happening in both Markets before you dive into that.

In General I really like put options as a low risk hedge, but they can be pricey and most of the time. They are good to use in strong rallys when you can start buying out of the money positions that you are happy having as backstops.

As far as spending $65000 for a $1000000, to me that only makes sense if you participate at a high level in Crop Insurance and Agristabilty 6.5% premium for only the price portion of one of your crops in pretty steep.Not saying it the wrong thing to do you might look like a genius whens its all done, just make sure you take everything into consideration.

[ward.toma]

Looking for information on how to use futures and options to reduce risk? Have a look at Alberta Canola Producers marketing courses under Upcoming Events on www.canola.ab.ca.

[$short]

Thanks Mbratrud.

It gives me something to think about. No options trading today. No wonder the US owes a bunch of money....they always on holidays!

[$short]

Mbratrud

Thought about using July Puts for now on canola
as a price hedge. Trouble is they expire in June
right? I won't have a good handle on production
yet and will be difficult to start pricing at that time.

They would be cheaper though. My plan is to
have it ALL seeded by then!

Please be dry, please be dry, please be
dry......then rain a little bit!

[mbratrud]

Correct July doesn't give you much time, but it does protect you until the 3 rd week in June. Which allows you time to assess your own situation as well general market signals at that time. Also I would suggest if you use the July to use it in combination of shorting futures and Nov puts like I said to bring your over all premium down.

By the 3rd week in June you should know the following. Seeding intentions for Canola, Whether or not Old Crop is going to run out like some predict. How big the South American Soybean crop was. Us Soybean intentions. European Debt crisis etc, and what you got seeded on your own farm. If you get answers to many of those questions by the time your option expires, you should have a pretty good idea what your price risk is.

Another thing you need to look at if you do July options is look at the July Nov Spread. right now at $20 many years would be at risk of widening. This year when canola stocks could get tight by mid summer the spread may narrow, (or that could be accomplished with basis). But you would have to make a decision there as well and possibly at a later date buy the July Nov spread or if really short canola going into summer can likely leave it. Many moving parts to consider.

More food for thought.