canola strategy

[pgluca]

Any body considering straddling the market with out of the money puts and calls or shorting the futures and buying a call??

Regarding the eventual western Canadian canola supply, I don't think canola will be in as short a supply as some people think. Southern Alberta is normally not really canola country (except for seed production on irrigation) you normally have to go for miles to find a yellow field..........however this year there is at least 5 times as much canola as ever, the country was yellow a couple of weeks ago, it is filled now and it is an unbelievable crop, not in the bin yet but canola can take this unreal moisture we have been having better than anything else.

[mbratrud]

pgluca If you short the futures and buy a call what do you hope to gain over a put option?

[jdepape]

Errol:

The animal we're talking about is the one you first
mentioned - "sign a DDC contract, then buy a call
option".

And I agree - "a basic DDC contract (without a call
option attached) will always offer a grower a
higher-price then a straight put option". Not what
we were talking about but correct nonetheless.

As for farmers "refusing" to deliver off the
combine, yes there will be cash flow needs - my
example was meant to be an illustration, not a
projection. The point is that farmers' delivery
behavior has a significant impact on price, mostly
basis.

[jdepape]

mbratrud:

I think we've both seen times when demand was
strong and we're shipping as much canola as we
can, and the basis (price) is still weak. IMO, basis
is more a function of what's in the pipeline
compared to what is needed than anything else.

If visible stocks are building, basis (price) will
weaken.

If visible stocks are getting smaller, basis (price)
will strengthen.

Both these happen regardless of strong or weak
demand - its the supply/demand balance in the
pipeline that matters most.

As for a strong basis in Vancouver not being
shared with farmers when the pipeline is full, I
don't think I've ever seen a situation where export
basis is strong in Vancouver yet weak in the
country - unless there is some form of congestion
like rail disruption. If the pipeline is filling, the
grain merchant's job is to clear the market - they
do that two ways. Lower the price (basis) to
farmers to dissuade them from selling/delivering
more and they search out additional demand -
also through lower prices (basis).

Export basis should not remain strong if country
basis is weak (without a system problem as I
mentioned).

2008 was a unique experience. Basis got
extremely wide for two main reasons. The
volatility in the market was huge - as a merchant,
if you bought a lot of canola that needed to be
hedged, you were uncertain whether you could
get the hedges off at the right level and so adding
protection with a wider basis was prudent.

Also, more importantly, with markets going so
high, and handlers being basically short, their
margin calls were getting huge. A very large
basis was aimed at turning the selling off.

Even the big guys were feeling the financial pinch.
Some (very large companies) stopped forward
contracting altogether because they we're running
out of liquid capital.

Sorry if I'm sounding preachy. That's not my
intent. I just really get into these discussions.

[jdepape]

mbradtrud:

I'm not clear about your deferred basis example.

"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."

Are you just locking in a basis, or selling flat
(DDC)?
What do you mean by "hedging the basis"? What
is the grain company doing?
If the price falls and there is a margin call, the
company must be long. Are you saying they sold
the canola flat and hedged it?

[jdepape]

pgluca:

On your straddle idea - were you thinking buying
both puts and calls, or selling both?

Just a thought - but as a hedger, you don't need
to do both. Buy a put to give you a floor price, but
assuming you have a crop, buying a call is adding
to your natural "long". If the market rallies, you
gain by owning the physical and by owning calls.
It's like doubling up.

Selling both gives no hedge coverage. It is a
strategy to use when you think the price volatility
will die down and the price will end somewhere
between the strikes. Again, not a hedge strategy.
(Although it is a decent spec strategy - one I have
used a number of times.)

Shorting the futures and buying a call is a
"synthetic put" because its results are theoretically
exactly the same as buying a put.

[jdepape]

One more thing before I go back to work....

I was concerned the other day when, talking to a
friend about the canola market, the tight year end
stocks and the huge inverse between old crop
prices and new crop prices, he said his strategy
would be, considering on what's going on the US
markets, to just lock up the bins and wait.

When I reminded him there was a $70/tonne
inverse (at the time) he looked blankly at me. I
reminded him that the new crop prices would
have to rally $70 just for him to be "even". (I was
surprised because this guy used to be a trader -
seems he forgot a lot of it.)

"Inverses are meant to be sold". The best
practice is to clean out your bins completely and
sell at the higher old crop price. If you're bullish
new crop, own new crop (in the field or with
futures).

I know farmers who still think like my old trader
friend. There is no good reason to keep canola in
your bin unsold through this inverse.

Just saying.

[cottonpicken]

I was concerned just now reading a bunch of bullshit
that holding canola while soybeans break to all time
highs is a bad idea.

just saying

[charliep]

Meal side is the dominant force in soybeans with soybean oil the drag. Soybean has been rallying but still 50 cent/lb range. Been away and did my review of the charts. Beans and corn added $3/bu over the past month. Wheat not farm behind. If we maintain the current pace, that means $11/bu corn and $20/bu soybeans by the 19th next month. Can the markets maintain this pace higher? What is happening to the demand side - particularly on corn but soybeans are highly reliant on China (represents trade close to 5 times the size of the Canadian canola crop).

[charliep]

Not quite 5 times. 61 MMT forecast (you run the Canadian canola number).

[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.