Canola Price Protection

[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.

[rockpile]

Why no mention of Call Options?

[mbratrud]

Call options work as well but for the purpose of insurance from the price going down you need to have Actual product contracted then use the Call option to allow you to capture upside.

So in many cases a put option is more effective as price protection. Call options work well if you need cashflow and need to sell your Crop but want to stay in the Market in a low risk way. For example sell canola off combine then buy a call option if you believe market has upside.

[rockpile]

Yes, and I think calls, if the premium is reasonable,
might be a good tool this fall for wheat and durum
wheat.

[mbratrud]

Rockpile As long as the liquidity is there you could be right.

[TOM4CWB]

Bucket,

If you buy that $480 put.... and it drops to $460 before it expires... and you think that is the bottom of the market at that point.... you put a long position on in the same month. At that point you have a 'synthetic' Call.

If the futures market were then to rise to $550/t... you would capture $90/t in the 'long' futures position... and as option expires you owe nothing.

Margin calls were required to cover the long position IF the futures were to dip below $460 dollar for dollar in the past.

AS we sold Canola in the past... we would protect the sale with these 'synthetic' calls to cover off risk of not having to canola to deliver... if our production failed and we did not have the grain to fill the contract since we then would owe the increase in the futures.

For example:
Then the $90/t could go to pay out the deferred delivery contract when a cash sale deferred delivery was done at $460.

By using the futures contract in combination with the put that was purchased... it costs much less than trading the options or buying calls as the market changes.

On our Bunge and Cargill Specialty Canola... 10 bu/ac are risk free... which is in all respects a put without the premium cost. The same futures tool can be used to turn those puts into synthetic calls... should you get well over 10 bu per acre... but want to sell 20bu/ac before the actual delivery.

Hope this adds to your 'risk' managers tool box...

Always remember... a little knowledge is a dangerous thing... as Katoe proves!