Proof mathematically that marketing works

[charliep]

tweety,

I am going to set up a scenario for you. A young farmer has major payments to make in the fall. They plan to make these payments with canola sales. Crop is okay but needs rain. At this point they are not prepared to sign a DDC because of the production risk. They obviously would like a higher price but they are willing to live with something close to $11/bu. They don't want their price to slip below $10/bu.

In your opinion, would they wrong in buying puts as price protection? Likely to cost something in the order of 50 cents/bu to get a close to an at the money put. We are talking about an individual manager decision in their business - not a decision for all farmers. To highlight we are talking about risk manager - giving up some gain to protect against pain.

[tweety]

Absolutely not wrong. I'm not sure why it took 30 posts before someone mentioned a put option. Thx Charliep.

Protects his bottom price less premium, expires worthless if, like potentially this year, it goes to 20$ and then does a DDC or cash sale. If canola goes to 5 because SF3 floods the market with incredible yields, he gets 10 something.

Any other sure win risk strategies?

[btjadenlepp]

There are two separate decisions:
1. sell today or wait
2. have I sold enough to deal with my storage/cash flow needs

At FarmLink we make each decision in isolation of the other. Marketing Advisors keep on top of No. 2 for their clients, while the Analytical Team calls the markets.

I have tracked the math back over the years as we've grown our business. Sales recommendations (again, different than sales being made for farm management reasons) have netted out in the top third of the range of cash prices for the crop year. That's measured as the net weighted average result of 4-5, 20%-ish sales made over the course of an 18-month window.

www.farmlinksolutions.ca

[tweety]

Do those recommendation come from the knowledge of eating breathing and sleeping what is going on with markets locally and worldwide - something a farmer would extremely rarely take the time to do?

[cottonpicken]

Or sign the contract and cover through calls and take the mathematical beating of 70-80 percent of options trades beinging losers

[tweety]

is it possible for all farmers to sell all grain in the top third of yearly average price?

[tipsy]

charliep as of today conditions and tomorrow's weather forecast what are the benefits of put's??

[tweety]

Tipsy, since posts disappear down below ads, want to start this topic as a new one? Its a great q

[charliep]

The advantage of a put (or futures for that matter) is that you have locked in a price but have not committed to a grain company delivery. In the case of a put, you have locked in a minimum futures price for a premium but you have left the price upside open if prices go higher. Likely expensive know given the market volatility. Wouldn't use puts on the whole crop but would consider doing some with your financial situation the final deciding factor.

Again, everyone has to look at their own situation. From a market side soybean oil seems to be stalling out a bit. I recognize potential to be a small crop but I highlight your fate lies in the hands of China and the export demand they represent. They will change to other commodities if canola/canola oil get too expensive. They have to - not enough supplies to meet their needs. Demand destruction has been mentioned by at least a couple of others on this website.

[farmaholic]

If you feel the market won't fall, no need for a put/floor. But since I don't buy options and feel tipsy is correct, I will gamble.

Every day that goes by without precipitation in the dry areas yield is being lost. Reports of reseeded crops sitting in dry ground. Frost damaged crops that didn't get reseeded have had their potential reduced. At this point, this isn't shaping up to be a real pretty year. Not lost, but not as good as some past years.

Is doing nothing a marketing strategy, I think Charlie said it is.

A $490 Nov canola put is $22.20, a 50 cent/bu premium. So you have to see more than a 50 cent drop in the price in order for your put to pay off, otherwise keep your money in the bank. BUT NOBODY KNOWS.....

[farmaholic]

Maybe I should have said, if you can't afford a 50(plus)cent/bu drop BEFORE YOU NEED THE CASH CANOLA....maybe you should consider it.

[tweety]

I don't think anyone is arguing that a put is a bad thing.

[Hopperbin]

Do you have put and call mixed up? 490 put at 22.50 is really retarded when you can sell today at 490. A 490 call at 22.50 makes sense to gain upside.

[Hopperbin]

But price has to drop 50 cents per bushel before into money. Really bad risk scenario for today.

[Hopperbin]

But price has to drop 50 cents per bushel before into money. Really bad risk scenario for today.