Canola Marketing Idea

[charliep]

Just a thought for a canola marketing idea.

Background as to what your situation might be.

1) Need cashflow off the combine with canola the crop you are planning on selling.

2) At least some weather impact on yield potential. Are reluctant to sign any more DDC until more comfortable with yields.

3) Would like to get at least $7.50/bu.

4) Would sell the whole crop if you were offered $8.75/bu.

5) Hate to spend hard earned money on buying options.

Idea: Base on the assumption Nov. WCE canola futures go to $370/t this next week and local basis is $10/t.

Buy a Nov. 340 puts (assuming a $10/t basis, that guarantees a minimum price of $7.50/bu). Sell an equal amount of Nov. 400 calls - the worst that will happen is you will get exercised on in the case of a canola Nov. futures rally over $400/t and be short canola at $400/t or have a price locked in of about $8.85/bu. The price of the selling the call should be close to offsetting the price of the put.

Others thoughts.

[charliep]

Last line should be "revenue from selling the call should be enough to offset the expense of buying the put".

[TOM4CWB]

Charlie,

This is a good tool for a normal year, but is that what we have this year?

I did exactly what you say, only in wheat in 1996. I thought that the price of wheat couldn't go much over 4.25, so I sold the calls and bought the puts.

Guess what, the price went to $6.24, and I had a margin call for $2/bu!!!

I had the patience to pay the margin call and wait for the price to come back down..., but if I had been spooked out of the market at $6.00, the losses would have been huge!!!!!!

So anyone doing this kind of risk management can be rewarded, yet they must be prepared to put up big dollars if unusual things happen!

So are we well enough financed to take a hit of a dollar a bushel minimum, if things go against us!!!

Now where is Kernel???

I laughed when he put a $9/bu target in on Canola, but he must have had x-ray vision of the future when he made that call earlier this spring!!!!

Kernel, your optimism made me very conservative on hedging, this forum could have saved a big chunk of money, if people were being sensitive to what was being honestly felt!!!


Intuition is close to 50% of good business sense, being able to listen to that still small voice that makes us nervous... and swallowing our pride and not being too confident, yet knowing our needs...

[TOM4CWB]

Kernel***

On March 7 you said,

"The canola market is starting to show signs of an upward trend boys, get them GPOs in now for Oct. delivery.

Remember we are trying to push the market up. Put it in for $8.50/bus. with expiry date of May 20/02. The expiry date will push them traders a little harder to gain supply. Do not take a basis contract.

Do it tomorrow to push the spring rally alittle. The Kernel "

Did you renew your GPO, or fill it at a lower value?

How is your crop, by the way???

[charliep]

Kernel - I will lick my wounds. With a zero basis, you still need $372/t Nov futures to get there. Beans as of today started to stuggle in their rally. $8.50/bu is a possibility but I wouldn't get any greedier. The US soybean crop is in good shape. Argentina has lots of old crop beans they will sell at some point inspite of their economy. The rally is occurring just at the time when South America farmers are doing their budgets for 2003(el nino would help by kicking in). Last concern is the demand side with China the billion question - will they back off or continue their oilseed buying binge.

Tom4cwb - Your points are well taken. You have to be committed to the plan I outlined and realize the margin risk if prices head higher (keeping in mind this is a hedging strategy). From what we know today, something over $400/t canola futures is a long shot unless weather hammers the US (at least until winter 2003). I might have a look at the monthly WCE canola chart to see how long canola has held over $400/t. These prices were accompanied by 28 cent/lb plus CBT beanoil.

[charliep]

My May 20 expiry date slipped by without a taker at $8.50. I reentered a GPO at a nervous $8.25. About June 18 I cancelled my GPO as my crop was looking dam dry and patchy. I was afraid someone was going to buy my canola at $8.25 and my crop would fail and wouldn,t beable to fill the contract.

I'am sitting on the sidelines now waiting for some more rain, I had got an inch and half of rain and the crop is improving but will need a lot more anytime to make 30 to 40 bus. If it doesn't rain shortly it could be write off time. I have registered with Monsanto as a possible TUA refund if my crop is written off by the 15th of July.

MY feeling on the nov. future is higher. I'am thinking higher than $8.75 and reason for this thought is that the belt of farmland in Western Canada that produces the majority of the canola has the worst crop coming that history has ever witnessed.

Secondly Monsanto has writen off 500,000 acres of their TUA so far by the end of June and believe that another 500,000 will be written off in July.

I might be wrong but I'am going sit on the sideline for awhile. My advise would be not to price any canola until we can see or feel a break oneway or another in this weather. HOLD ON.

Tom the crops are the S---s but thanks for asking. Don't tell anyone Tom but I think I will sell my canola at $8.90. (That little voice is nagging at me).

[charliep]

Just a note to keep the world vegetable oil/oilseed in mind before getting too bullish. I review what I said in March and the main difference is slightly higher beanoil than I had expected.

I think western Canada could have produced a 5 to 6 MMT crop this year and had minimal impact on prices. The 4 to 5 MMT crop we seem destined will not result in premiums people may antiicpate (unless beanoil moves over 20 cents/lb on a sustained basis). I would trade the current improvement in price for the yield loss that has occurred over the past month (prices up 10 to 15 % offset by overall yield declines of 20 % plus from potential).

A interesting challenge that both you and I had kernel is we wrote down ideas/forecasts and were able to review them 3 months later (I will do at 6 months, 9 months and a year). The idea is not to feel guilty but rather to see what was missed/how to improve. The GPO excercise is about having price targets and logic behind them.

[rain]

Wait and see is probably the best option to take on canola right now. Down side is limited in my mind. I do not think their is much reason for futures to go below $350.

New crop barley Dec delivery is $3.41 delivered Calgary region. New crop wheat is $4.25 December delivery.

[charliep]

Rain

Thoughts whether you would sell at these feedgrain prices.

A comment is that Alberta is likely to look at a pretty flat feed grain price with Edmonton prices similar to Calgary/Lethbridge because of tight feed supplies in the North. The other comment is that these new crop prices are better than CWB malt PRO's forecasts(maltsters will be worried) and close to the PRO values for low protein 1/2 CWRS (high quality milling wheat in hog rations???). An interesting year ahead.

[rain]

Charlie I don't know if you remember last fall cash barley was $3.25 Calgary. Malt growers where wondering what to do. All of the sudden the Initial price took off and low and hehold malt and feed barley where close.

Spot wheat in the Calgary region is currently $165-$170 if you look. PRO for #1 13.5 HRSW is $201 less deductions $36.00 down here and you have $165.00 some time next year.

I am advising my guys to hold their A series wheat untill the initial prices matches the feed values.

Barley has traded as high as $175.00 Calgary region.

As far as barley goes $3.50 new crop FOB Calgary bin is where we plan to book some more.

Market conditions are tough right now. Southern Alberta looks good. But their problems may end up ahead of them. Very lush thick stands could make for high yielding popcorn if more rains don't show up.

[TOM4CWB]

Charlie,

My banker said south of Calgary in some areas is starting to burn, I don't know how true this is...

Foolish me bought 300t of Nov 02 350 puts last week but I want to lock up the higher value than the Crop Insurance 320/t and or have a reasonable price on the few tonnes we will produce.

Any Idea what the increased adjusted mid-summer crop insurance values might end up at?

[charliep]

The mid summer prices will be announced mid August. We have a month of weather ahead of us both sides of the border so I will not second guess the results. For management purposes, you may want to look at current new crop prices and this will likely give an indication of direction (magnitude is story to be told).

[TOM4CWB]

Charlie,

I see Nov. 02 Canola traded today over 400/t, what a difference a couple of weeks can make!!!

[charliep]

I agree Tom. I still like the idea (for those that are somewhat comfortable on the yield side) of at some point buying some puts to protect prices on this rally. Selling calls (keeping in mind your experience) is also a good strategy for a disciplined hedger (if I see $10/t - $440 to $450/t Nov futures, I will sell).

An interesting discussion for this winter will be to review marketing strategies and use the lessons learned to improve techniques.

[charliep]

Just thought I would put a note in to keep this thread alive. Interesting times with US markets on fire and the looney taking adive.