Canola Price Protection

[errolanderson]

Good morning all . . . .

For those of you that need new crop
canola protection beyond fall deferred
delivery contracts, here's some put
options to consider.

November canola $480 puts are trading
for $15/MT. Floor price = $465/MT
($10.55/bu) less your fall delivered
basis

November $500 puts trading around $25/MT
Floor price = $475/MT ($10.77/bu) less
fall delivered basis.

Advantage of puts is no delivery
obligation. Best guess scenario is for
canola to roar higher and these puts
expire worthless. But if world economy
slumps further, these protection tools
may be good to have in your back pocket.

Errol

[bucket]

Can you run through an example of how this works?

I don't price until I know what I have.

[errolanderson]

Here's an example . . . .

Lets say you own Nov $480 puts for $15
and the market grinds to $440 by
harvest. You have the right to sell at
$480/MT. Your profit in this example
would be $480 put strike - $440 actual
fall futures price - $15 premium paid =
$25/MT. Add the $25/MT to your fall cash
selling price.

But if Nov canola remains above $480/MT,
your option will simply expire. And
there is no risk of margin call. Just
pure, old price insurance.

Errol

[bucket]

Who do you pay the 15 dollars per tonne to?

So,for a 100 tonne contract, it would cost you 1500 dollars to get 465 per tonne when the market is at 440.

It cost you 1500 to get 2500.

Or am I missing something?

[bucket]

And if it stays at 480 it costs you 1500 per 100 tonne contract to get the same price as just signing a fall contract now?

[riders2010]

Bucket you can send me the 15 bucks a t and I know you are gonna get a bumper crop so sign up lots!

I'm not worried about ever having to pay you because I listen to cotton all the time and he says grains are gonna rocket!

anyone know some good spa resorts in mexico next fall! lol

[errolanderson]

Bucket . . . you need to set up a
trading account with a commodity broker.

Once this is set up and funded, you can
issue an order to purchase options for
your farm operation. The premium (or
$15/MT in this example)is then deducted
from your account.

Grain companies also have programs, but
check the premium costs. If you go
through Winnipeg ICE, you need to set up
your own trading account. I am a
registered commodity broker, but there
are several sprinkled across the
prairies.

Errol

[bucket]

How much to open an account?

Any guarantees to make money or will a customer hear things like "...we never seen the market behave like that..." or the classic... " statscan just found 750,000 tonnes in June and prices are set to tumble.."

And the question is still unanswered - does it cost me 1500 to make 2500?

[wd9]

Bucket, why do you think they live in marble buildings downtown? But yes, to answer your question, it does.

I do the sell after its in the bin too and know what i have. It's an absolutely acceptable marketing strategy.

[errolanderson]

The $15/MT in this example gives you the
right, but not the obligation to sell
November canola at $480/MT.

Should Nov canola work to $440 by
harvest, your put option at expiry (the
3rd Friday of October) would be worth
$40/MT or $4,000 per 100MT ($480 Nov
strike price - $440 Nov futures =
$40/MT. But you have paid $15/MT for
this right = $2,500 gain or $25/MT.

If Nov canola drop to $400/MT, your
total value would increase to $8,000 -
$1,500 premium paid = $6,500 profit.

But if Nov expires at $480 or higher,
your $15/MT is gone. But the good news
is cash canola prices are also higher.
And with options, there is no delivery
obligation, no payout penalties, that's
why growers can be more aggressive
protecting a larger % of their new crop
crop.

Hope this makes sense . . . .

[katoe]

You have got to be kidding bucket right? Here I thought you were on top of all this grain marketing stragies and turns out you don't even know what aput is?This is grade one stuff. Its called managing risk.No wonder you always made irrational statements about the contingency fund.It all makes sense now.Our farm started using these stategies 20 years ago.Yes, there is another use for the term but itsin golf.I bet you never thought acwb supporter golfed either.

[bucket]

So katoe, now you can explain the 250 million discretionary trading loss the cwb incurred a few years back?

And you are right, I don't trade futures.

Seems easier to price at the current levels (same result)without having to write a cheque to sell my grain.

And could you point out my irrational statements about the contingecy fund?

The cwb lost alot of money but the way I understand the marketing strategy from Mr. Anderson is to mitigate risk. Meaning, to not lose money.

Doesn't seem the cwb used it correctly.

Mr. Anderson maybe could comment.

[FarmRanger]

Puts are a good marketing risk management tool. I bought 520 puts last spring, and paid around $14 for them. They expired worthless, and that's OK because I didn't see the bottom fall out of the canola market for the rest of my crop.
This strategy did insure that on at least a portion of my crop, the least I would have been paid was $506/tonne, and I didn't have to worry about filling contracts if the bushels weren't there. And if the price would have went up, then I would have received the higher price.

Managing risk has it's price, but it also should provide some benefits.

AFSC's spring price endorsement (similar to a Put) numbers are coming out soon, and I would compare them to Put prices; last year the put was the better option, but that isn't always the case.

[errolanderson]

well said Farmranger . . . .

If puts make you sleep better at night,
that is benefit alone. But on occasion,
this tool can really kick in and protect
a producer.

Have seen this in the cattle feeding
industry, when at times, the value of
the put represents the profit in feeding
cattle.

The AFSC program should reviewed and
compared. Last year, puts by themselves
appeared to offer better protection, but
that is not always the case like
Farmranger mentioned.

Errol

[mbratrud]

Put options are essentially price insurance. Like any insurance there is a premium. Most of the time its a good thing if you don't need the insurance.