Production vs Marketing

[errolanderson]

If you do not want to commit to signing
fall tonnage on a deferred delivery
contract, these are put options of
interest.

November $550 puts might trade for
$20/MT today. Strike $550 - Premium $20
= $530/MT - fall delivered basis. It
appears Nov basis levels are running $10
under to $10 over.

Remember, with this risk management
tool, you are not obligated or produce
or deliver the canola. It's pure price
insurance without risk of payout
penalties or grade concerns.

Best guess scenario is that they expire
worthless. That means that Nov canola
expired at or above $550/MT

But if Nov drops to $480 into the fall,
you will be $70/MT in the money and can
cash them out at a huge profit.

Errol

[freewheat]

Great point Coleville. And though we may
study the projections, and hope for the
best, it is still quite non-scientific,
fairly wild a guess. Within rotational
needs of course.

[charliep]

On Errol comment, I will through Spring Price
Endorsement into the mix if you live in Alberta. The
insurance price for crop insurance is $500/tonne with
the market needing to dip below $450/tonne to
trigger a payment. You can compare the cost of an
SPE to the put option that Errol talks about. An
advantage is you can also use an SPE for crops
without futures markets or ones that are not as well
defined in the new world (eg. wheat in the coming
year). The base grades on AFSC/SPE insurance
grades likely fit the profile of what farmers in Alberta
can grow.

Errol - Just curious if any of your clients are looking
at buying put options in MGEX or KCBT? Corn as a
weather hedge?

Good discussion.

[charliep]

The $500 is canola by the way.

[errolanderson]

Charlie . . . we have been actively
purchasing new crop (Oct,Dec) put option
bear spreads primarily on Chicago wheat
for growers as protection for fall. This
has been ongoing for several weeks now.
In this strategy, we buy a put and sell
a put to create about a $1/bu of
downside protection for a reasonable
price (ie: 30 cents/bu)

We have also been guarding barley price
exposure with corn puts outright. Some
growers have purchased Dec corn calls or
call option bull spreads for barley
price replacement in the event of a
summer weather scare.

Errol

[cottonpicken]

Very,very,very little downside in the wheat market
imo.

[errolanderson]

cotton . . . a lot of these growers
guarded their new crop wheat prices at
much higher levels than today's price.

[wd9]

Larry, if marketing worked, you'd be
retired by now. Its a fricking guessing
game based on hunches and dart boards.
Best you can do over the looooong haul
is be at par.

You can do both, we sit on our
collective asses all winter, plan
marketing then, but the markets were
never designed for the farmer to make
money on.

Take this year for example. Best i could
have done is absolutely nothing, and
just sold today for cash. Take a lot of
'clever' marketing to make up the
difference of selling ahead over the
past year and just doing cash.

Has anyone ever sat down and compared 2
different methods of marketing?
1. Sell this time of year when prices
are generally good for cash.
2. Do everything from puts to calls to
margin calls to speculation to buy sell
and margin calls, like the 'market'
experts tell us to hoping for a better
return.

There has to have been a study done. If
not, maybe ACPC should fund one.

[Hopperbin]

Errol can you elaborate on how those farmers got protected at better than todays price, can you give an example with real prices costs etc? Which futures they are working off? What are they buying a put and a call?

[Hopperbin]

Errol can you elaborate on how those farmers got protected at better than todays price, can you give an example with real prices costs etc? Which futures they are working off? What are they buying a put and a call?