canola strategy

[jdepape]

cottonpicken:

At the time of my discussion with my trader friend, there was a $70 cash inverse. The inverse is now gone - it's what they do.

Sounds like you're saying that a guy should hold canola because soybeans are breaking to all time highs. I'm saying - stay long, just not with your canola in the bin.

Let's say we both have 500 tonnes of canola sitting in our bins.
- Spot bid is 14 over July (610 14 = 624)
- New crop bid is 16 under Nov (570-16 = 554)
(I'm making these numbers up - the only thing that matters is the spread of $70 which was real in early June).

You decide to "hold" your canola.
I decide to sell mine and replace it with new crop futures.

You are long basis at 14 over and long futures at $610.
I sold basis at 14 over and now long futures at $570.

Nov is now $635.80 (today)
Spot basis is 33 under (Bunge quote)

On flat price (futures) you have gained 25.80
On basis you've lost 47.00
Net you are down 21.20

On flat price I'm up 65.80
On basis, by selling at 14 over, I am ahead of the market by 47.00.

Let's say neither of us grew canola this year, so to have the same position as you (with canola in your bin), I go out and buy canola at 33 under. Now we both have the same position - both long 500 tonnes of canola at 635.80-33 = 602.80

The difference is, since the day I sold my old crop cash, you are down $10,600. Not real money, just on paper because your canola has lost that much in value.

Meanwhile, I am up $32,900 in real money (from futures). On basis, I am up an additional $23,500 because I replaced my 14 over cash with 33 under cash. Total I'm ahead is 56,400.

Difference between the two strategies = $67,000 (134/t or 3.03/bu)

If you still think you should hold anything through an inverse, I'll take the other side of that anytime.

[cottonpicken]

Ok,so what is the best strategy for the 80% of farmers
who don't have a brokerage account?

Yours or mine?

And what where your price targets 3-6 months ago?

[jdepape]

In this last inverse you'd be ahead by $3.00/bu by using my strategy over yours. Surprised you need to ask which is the best strategy.

For all those guys that don't have futures accounts, I suggest open one. And then stay disciplined and use it only to hedge.

And if $3.00/bu doesn't do it for you, and you feel better just sitting and waiting, then I guess you're OK with paying someone $3.00/bu for the right to store your own canola, because that's what you're doing.

My price target 3-6 months ago - are you talking old crop or new crop?

Otherwise, it's irrelevant to this discussion. Inverses happen regardless of what the flat price is.

But since you asked - since late 2011, looking at the expected ending stocks (under 400,000), I got so bullish I couldn't see straight.

[errolanderson]

Talking of myself . . . couldn't see
straight at all. Thought canola at $550/MT
was one hell of a sell . . . now $630/MT.

All I know is that it is the U.S. drought
of the century driving these prices NOT
canola ending stock numbers.

Errol

[jdepape]

Errol:

I agree on the cause of the current bull run.

When I said I was bullish I meant old crop (and the inverse) based on the ending stocks - I've seen this before.

I was trading for Cargill back in 1984 when canola ending stocks were 126,000 and June canola went to $722 (unheard of back then when $390 was considered huge) and the Jun/Sept was trading in excess of $150 over.

We were sending trucks around to elevators to clean out every bin of canola and build shippable supplies. At that inverse, it was well worth the added expense.

[cottonpicken]

"the inverse is gone its what they do"

And?

When somebody sets out to fleece a farmer/seller
they bid him into a trap of
backwardization(inverse),"they" understand the
situation.The sellers are blinded by basis.

"You'll take an inverse every time" ,not because you
can for simple logic of rolling it forward into futures
for the spread gain but underlying bull factors.

Don't worry i do it to,two sides to every
trade,someone has to burn.

Which brings me to an obvious question i don't know
the answer to,but you may.

If a major commercial is short,can/will they push a
market to inverse/backward and then with physical
backing navigate the options market to come out
positive?

[jdepape]

You ask: "the inverse is gone its what they do" And?
<b>In grain markets, inverses tend to correct themselves due to the cyclical nature of crop years. Or rather the market corrects the inverse.</b>

When somebody sets out to fleece a farmer/seller they bid him into a trap of Backwardization (inverse),"they" understand the situation. The sellers are blinded by basis.
<b>I don’t see an inverse as a trap, nor do I understand what you mean by “sellers are blinded by basis”. But I do know that inverses are not well understood in the farm community – so you are right – “they” understand the situation, and unfortunately many farmers don’t.</b>

"You'll take an inverse every time" ,not because you can for simple logic of rolling it forward into futures for the spread gain but underlying bull factors.
<b>Don’t misconstrue what I said – I said that if you want to hold inventory through an inverse, I’ll take the other side of that trade. In other words, if you want to own canola through a 70 over old-crop new-crop inverse, I’ll sell you canola now and buy it back later at a $70 premium to me. I'll do as much as you want and I'll do it all day long.
(I didn’t say I’d “take an inverse” – that doesn’t make sense to me)</b>

Don't worry i do it to, two sides to every trade, someone has to burn.
<b>I don’t agree that someone has to burn.</b>

Your question: “If a major commercial is short, can/will they push a market to inverse/backward and then with physical backing navigate the options market to come out positive?”
<b>If a single commercial is short and pushes the market to an inverse, he’s doing it – not on purpose – but to cover his short. If the market moves to an inverse because of him, it means the stocks in the system are light compared to overall demand, including his.
What do you mean by “physical backing”?
The only options play that I can think of in your scenario (if I understand it right) is to be long calls. But then he’s not really short, is he? If they are out of the money calls, as the market rallies, they eventually become in the money and counter the futures short. If he’s short cash, once the options strike gets hit, he can convert the options to futures and the futures to cash. So, yeah, he can own calls to provide some coverage, but it’s not perfect. </b>

[cottonpicken]

The whole purpose of a 70 buck spread is to entice
liquidation....no????

Basis-with the swings we have-is a worthless
barometer/measuring stick

Back in the doldrums,ok,fine come get the extra
pennies/cream.

In todays world with 100 shop rates and multi trillion
dollar deficits,40% monthly corn swings...

I think something/someone has to burn.

As far as the commercials,just doing some
hypothesizing,i've got other trades on and am trying
to figure out the life of a short covering rally,so thank
you i appreciate your comments.

[jdepape]

Lots to talk about but one comment caught my
eye - "basis is a lousy barometer".

If by barometer you mean an indicator of overall
market dynamics, I couldn't agree more. To me
basis is reflective of the supply/demand balance
IN THE PIPELINE and not the market in general.
Regardless of the total market dynamic, the basis
will do what it needs to do to service the pipeline.

[cottonpicken]

Your exactly right in a perfect world,but if i wanted
something to move at one end i would make it move
at the other first-you know what i mean- the basis is
then inverse in itself.

Not something that happens very often.