Canola Price Protection

[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!

[bucket]

TOM

What your opinion of pricing canola that is sitting in the bin at 12 bucks?

I realize its pure speculation but I know what I have and I am pricing as those 12's show up.

New crop is iffy without any snow and no major rain since June 2011.

BTW how much do you spend a year to market protect your crop in cents/dollars per bushel??

[TOM4CWB]

Bucket... we have used AFSC price insurance for a number of years. Good financing and payment terms on this.

Has it paid?

It will protect in the event of a real economic reck. Cost?

Princess says... $14/ac.

So there are cheaper ways to risk management... but not with a whole bunch more work to do it right and actually cover the risk off.

[mbratrud]

Agree with you 100% Tom that is a nice strategy

Many guys get greedy and forget to sell cash before they go long futures, then the essentially take away their downside protection.

If you buy a Put, then as you make cash sales instead of exersising your put option go long futures, It is a nice strategy especially if you need the cashflow, otherwise you just stay long cash to acheive the samething without margin requirement.

May want to look at rolling over Nov Puts to Jan if opportuntiy presents itself to at a reasonable price to give you a little extra time for Market to get through Harvest glut, to add extra value to Toms strategy. Pretty much have to wait until Late August Sep and expect cost to be around or a little higher than the cost of Carry Call it $8/MT have seen this done for as low as $5.

Man I hope ICE wheat and Durum have enough liquidity to use these strategies! Good conversation.

[charliep]

For Albertan's, the AFSC spring price endorsement will also provide an alternative for setting a minimum price. Prices and premiums aren't out yet.

Another way of locking in a minimum price with the pain the premium if prices go up (it is insurance) but the gain a locked in value on a percentage of your crop if prices go down. Another alternative to option strategies with cost versus coverage the ultimate deciding factor for a Alberta farmers individual situation.

[errolanderson]

Bucket . . . your question on amount
required to place in a commodity account

Depends on the firm. Some don't require
any deposit to open an account, some may
ask for an initial $10,000.

For buying options only, your risk is
limited to the value of the premium. If
you just want to buy Nov $490 puts today
@ $17/MT, you would be exposed and risk
$1700 per 100MT. If you buy or sell
futures, then you are at unlimited risk
and gain and must maintain a margin
account.

PS: $12/bu cash canola appears to be a
very solid price in the current market
environment.

U.S. unemployment shrunk to 8.3% from
8.5%. Impressive. Dow climbing today as
result. Canada's unemployment continues
to climb. Now up to 7.5%. Will loonie
back off parity as a result?

All the best with your marketing . . . .

Errol

[ward.toma]

Please remember that protecting from downside price movement with puts, AFSC price insurance products or short futures on product you own is risk management.

Trying to capture upside movement with a call option or a long futures position is speculating. Risk management is not "managing the risk of not getting a higher price than I've already locked in". Both are good ways to make as much money as you want from your business, but each requires a different approach, mindset and backup financing for margin calls etc. to be successful.

[TOM4CWB]

Ward,

"Trying to capture upside movement with a call option or a long futures position is speculating."

THis is not the case IF a grower is covering off risk for upside market movement... on a deferred delivery contract. It is pure risk management at that point... the speculation was selling canola BEFORE it was in the bin. The call is simply there to cover this risk if the market were to explode upward... and a buy out of the deferred contract was required because of non-delivery. Basis risk is still not covered... but seldom in canola fall delivery contracts does the basis contract to any large amount.

If a grower truly does not get production... few grainco's will expect much more than the futures losses on the contract. Good to discuss with your grain buyer... when contracting so no surprise if things go sideways...

[ward.toma]

Rationalize it however you want. Hedging
opportunity cost is speculation. And the
rationalization is what has gotten many
farmers in trouble with their hedging
programs.

[errolanderson]

Tom, I agree with you . . . .

If you sign a deferred delivery contract and want to purchase a call option in the event of market appreciation, effectively you are placing a 'minimum floor price' under your product ie: deferred delivery contract price - price of call option. This is business price risk management This is by no means pure speculation. |
You as a businessman are opening up your price ceiling with a guaranteed floor price. This is simply a smart business move that allows you to attain a floor price while maintaining the oportunity to capitialize on a market price rise should it occur. An excellent hedging strategy.

Errol

[ward.toma]

That is not price risk management, perhaps revenue insurance against production losses as Tom says, but it is not managing price risk. Maintaining the opportunity to capitalize on market movements is pure speculation is pure speculation. Price risk management is getting out of the way of market movements, getting the price as fixed and known as possible.