canola strategy

[jdepape]

Just to go back to the original topic....

I really like the idea of setting a minimum price
contract using options but Errol, I don't agree that
the call strategy gives a higher floor price than a
put strategy.

It appears you're using the 650 call (which is out-
of-the-money by almost $17); if so, the premium is
much lower than the premium for the 650 put
(19.20 vs 35.90 as of yesterday's close), but the
minimum price achieved would be the same
(assuming the same eventual basis - it appears
you're using a basis of 16 under).

650 call = 19.20
Min price = 633.30 (actual futures) - 16 - 19.20 =
598.10

650 put = 35.90
Min price = 650.00 (put strike) - 35.90 - 16 =
598.10

Using out-of-the-money strikes will give you lower
call premiums and the upside doesn't kick in right
away (Nov futures must move about $17 before
the call is in-the-money)

Compare the at-the-money 630 call to the 630 put
- the premiums are very close, you end up with
the same minimum price (lower than if you used a
higher strike) and the upside kicks in immediately.

The key difference between a put and call
strategy is that with the put strategy you aren't tied
to a DDC - which has its pros and cons.

[errolanderson]

thanks John . . . .

If there is no advantage signing the DDC
and buying a call then just buying a put
then from an options standpoint . . . it
may be best just to load with puts and
not commit to delivery.

But if you can commit delivery, a
deferred delivery contract (DDC) will
always net a grower a higher price than
a put option outright.

Jan canola $600 puts bid at $16/MT
today, if filled . . .

Strike $600 - premium $16 = $584/MT
($13.25/bu) - your Nov/Dec delivered
basis.

This option expires around Xmas.

[TOM4CWB]

errol,

Just did a batch at Viterra

$620 put at $21/t worst we can do is $13.17/bu fall delivery... upside open.

I think this is a fair way to reduce risk and find a home for grain off the combine!

[errolanderson]

That's a disadvantage of put options
with a broker is that it doesn't reserve
delivery off-combine . . . especially in
years of heavy supply.

According to Reuters survey, Cdn canola
production may be around 16 million MT,
up 13% from a year ago. Also, Oil World
stated that canola production may
outstrip demand this year . . . time
will tell.

[mbratrud]

Errol, John,

What I like Errol strategy for harvest delivery where there is significant basis risk in this rising market. Back in 08 we seen Basis soar to 40 - 60 under. Could that happen again?

I drove Weyburn, Regina, Stoon, Battleford, Wainright, Tofield, Camrose, Wetaskwin, Red Deer, Calgary, Brooks, Swift, Moosjaw. Last weekend, there is no dought there is alot of yellow but we all know that. The Yeild potential on that drive actually surprised me though, we are looking at an average crop. There are certainly areas that are fantastic, but many areas that needed rain 10 days ago. trend yield at best.

Even with trend yield and the acres delivery preasure will be high at harvest, and basis risk is significant during the harvest period.

Both options laid out are good depending on at the money premiums. but I think I would sign basis with put.

DDC with Call option or Put with Basis tied up both really good strategies if you don't mind coughing up the premium.

My 2 cents..... For me I am about 30% sold and know this crop is a long way from the bin.

[TOM4CWB]

mbratrud,

Viterra is putting the put premium into the basis so no cash needed to make a floor price.

Very reasonable way to do it.

[bucket]

Not a hope in hell this crop is larger
than last years. I would say well under
15 mmt. Lots of canola. Lots of heat to
come. Roots are not deep. You can't
judge a book by its cover. Unless
statscan is writing the book and the
experts/analysts/industry believes it.

Btw could anyone out there tell me where
the million acres of flax is?

[wilagro]

I just love it when you guys talk "stock exchange" dirty. What a thrill to outwit someone with tactics to "beat the system" and come out ahead...a gigantic POKER GAME for sure.

All this putting and shoving and hedging and shorting and longing...what a perpetual headache!!! Time for a drink break...make mine a double.

[errolanderson]

Mark . . . like your basis contract with
put option idea. And Tom, the Viterra
option looks quite attractive.

Agree, canola basis levels are apt to
widen out into harvest and it may be
November onward before there is recovery.
As bucket alluded: who knows how big this
crop really is before it is in the bin?

[ALLFARMER]

Lots of canola in the North Peace won't make it
out of 10 bushel/acre range. Westlock area likely
50 bushel or better range.

[jdepape]

Errol:
Still don't figure what you mean: "...a deferred delivery contract (DDC) will always net a grower a higher price than a put option outright."

Your "DDC plus call option" is exactly the same as a "synthetic put plus basis".

Put/call parity will ensure the cost of a put and a synthetic put will be the same (excluding transaction costs). The only difference between your call strategy and a put strategy is the basis.

Basis needs separate analysis. Your example implies a basis of 16 under - historically an excellent fall basis so, on that basis it may be a good strategy. But that shouldn't cloud whether to use a call or put strategy - it's irrelevant.

All this discussion around basis and crop size is good. One thing to keep in mind - basis has much more to do with the amount of canola in the pipeline (grain handling system) than the total supply.

Think about it - say we produce a record crop, but for some unknown reason, deliveries into the system are nothing more than a dribble, causing the total stocks in the system to drop - a lot. Do you still forecast a large basis? I'd take the other side of that bet.

If you're not feeding the beast, the only thing they can do to get what they need is raise their price (basis).

Mark - I agree with you about 2008 but the big - and not insignificant - factor comparing 2008 to this year is the loss of the CWB single desk. Canola has always been sold off the combine as a cash crop - in a big way - driving price (basis) lower. This year, wheat will also be sold as a cash crop taking the pressure off canola. Lighter canola deliveries will undoubtedly lead to better basis levels.

This year, for the first time ever, you will be faced with - to pay the bills in the fall, do I sell canola or do I sell wheat? Or, put another way, which do I store?

How guys answer that will have a much greater impact on basis than the crop size. My guess is the 16 under for fall delivery is an early indication that the trade already understands this.

[jdepape]

wilagro:

You misunderstand what's going on here. No one is trying to "outwit" anyone. We are merely talking about how to take what the market is providing to maximize returns while managing risk.

If this is too much of a headache for you, you still have the CWB to do it for you. And you will do well by them if they are up to the "putting and shoving and hedging and shorting and longing" - cause that's what they are there to do for you - always have been (whether you liked it or not and whether they were good at it or not).

[jdepape]

Stocks vs basis:

Oct 3, 2011
visible supplies = 1,562,700 tonnes (crop year peak)
Par region basis = 28 under

June 17, 2012
visible supplies = 113,600 tonnes
(crop year low)
Par region basis = 14 over

It's not a coincidence.
It's supply/demand on a local scale.


(Par region = the canola futures main delivery region (around Saskatoon)

[errolanderson]

John . . . not sure we are talking about
the same animal.

A basic DDC contract (without a call
option attached) will always offer a
grower a higher-price then a straight
put option IMO if purchased or cash
contract signed at the same time.

If including the cost of the call with a
DDC, yes I see your point.

For the fall basis, if growers refuse to
deliver off-combine certainty that could
tighten the basis, but is there no
cashflow selling required this year?

Fall delivered basis may be pressured
(weaken)IMO as commercial storage is put
to the test.

[mbratrud]

John,

From a demand perspective and the way things are shaping up Basis levels are going to stay very strong, especially Vancouver. However if the pipeline is full that doesn't mean the Grain Co has to pass that on. If you recall in 08 the wide basis was more to do with covering futures risk covering margin costs than Supply/ Demand.

I think it is possible for a simular situation to evolve.

Spot basis should stay strong with very little margin risk. Defered basis however could be different. For example futures go up to $700 I decide I want to put my Canola on basis with company X for Nov Delivery, if company X applies to a cash sale and therefore hedges the basis I have done with them, and the price falls $100/tonne or more, the cost of that Margin money has to come from somewhere.

As for CWB thing, I think there will be less wheat than ever moved off the Combine, and if I were to guess I would say record Canola sales made in the first quarter. IMHO. My reason is from the ground level the uncertainty in the grading and contract risk around grade spreads, is holding guys back.