Managing Canola Price Risk

[melvill]

For those of you who have your canola in the bin, there have been some great price risk management opportunities lately. I know that everyone is a canola bull right now but I know there is still some $10.00/bu canola in the country from the last time prices got this high several years ago when cash didn't quite hit 10 bucks.

1) Extremely low basis levels for late May, June-July delivery available lately. Of course, signing up a majority of your seed for those contracts means limited cash flow until delivery time in the summer. Has anyone (with seed in the bin) signed up?

2)July canola futures made new contract highs yesterday and today (Oct 24). That tells me that, as a risk management strategy, it's time to lock in the futures price side for at least part of the tonnage of the basis contracts mentioned above.

3)Or it's time to short (sell) canola futures as price protection for some unpriced inventory with the idea of locating a good basis contract to match the short futures with. Anyone considered or done any of that?

4) Nervous about shorting (selling) futures? How about using March Put options? A March 440 Put is quoted today at $17.50/tonne which is a little pricey and it expires in February but it protects against a downturn but allows taking advantage of a futures rally later on.

[TOM4CWB]

Lee,

This has really been a tough year for pre-pricing strategies...

When Lucy and I took marketing courses, a brief mention was made of cash vs. pre-pricing marketing comparisons...

And the brief mention that she and I remenber was that over the long haul, if the marketer is consistant, the returns were the same for both strategies...

The main difference was income variation from year to year.

Cash pricers had a much higher fluctuation in income, while pre-pricers were leveled out to a large extent.

Pooling levels out the fluctuations as well, which is why it is easy, simple, and attractive for those who would like to spend more time on the Ag production side of the business...

Why have pools for Canola never been given serious consideration by our Canola Marketers?

Lee, how much free Canola is really avaliable right now for spring 2003 delivery?

Isn't it true that by far the largest acreage still out in the field is... CANOLA...???

[melvill]

The most recent estimates I've seen for canola still in the field are these:

Manitoba - 1% left in field
Saskatchewan - 24% in field or about 300,000 tonnes
Alberta - 60% in field or about 450,000 tonnes.
Trade - 750 to 800 thousand tonnes

So if canola production is 3.2 MMT (probably less than that) that leaves quite a bit in producers' hands, although I expect it's in really firm hands.

Tom, how much of that is unpriced waiting for some combination of basis and futures that gives $11.00? That's what callers are asking me.

[Kasro]

Lee,

I'll take up the challenge too.

But I noticed a couple of things!

1. You market gurus always want to remind us of pricing opportunities passed up! What about the guys who have last years canola still in the bin? Seems to me I could have sold it for $100 a tonne less a year ago! How about some credit for that risk management strategy? For what its worth, I think there is a lot more of this that happens, than missed high price opportunities. But it seemed to me that selling a $330 last fall was pretty risky.

2. Contract highs signal you to lock in futures? Pray tell me, if that was my trigger, how would I ever achieve anything better than the lowest price available in a price rally? Contract highs are set all the way up.

So here is my strategy for now. I'll watch this thing unfold. Small canola crop, tight US bean carryouts, potential problems in SA (later or smaller crop than anticipated at this time), tight world oil s&d's. This against a potential for a large SA crop, poor economies getting no better, and the probablility of next years crop being much better.

I like the $10 canola. But last time we were close to here we had 28 cent oil, and a 75 cent dollar. Now we have 20 cent oil and a 65 cent dollar (so I need a bit more!).

So I'm going to risk a dollar on the downside to $9.00. That is still a good price. And I'll wait and see if and how much higher this can go. Right now I can make a cash flow sale anywhere, and do well.

Wadya think?

Kasro

[melvill]

Okay Kasro, I'll bite. Just don't reel me in too hard.

The extremely low basis levels aren't hindsight. As far as I know, they're still available.

You're right, new July contract highs still climbing but new contract highs are not always set in every rally. Look at the July chart. A couple of days ago July futures surpassed two recent highs. Same thing with the Jan futures. So, as a risk management strategy, that is a warning that the rally may be running out of stream which means greater vigilance for farm managers looking to price.

3) One more thing. Pricing in this environment is good risk management. However, pricing every unpriced bushel . . . er . . . tonne isn't. Why? Because pricing into a rally and adding more pricing as the price rises results in averaging up and because nobody but nobody but can regularly pick a price peak. (Of course, those that do have a significant bill on coffee row!) Why? Because we never know where the peak was until after it has happened. Ask a manager of a commodity fund. They NEVER try to pick a price peak. They continually average up or down depending on which side of the market they're on.

So Kasro how are you gonna know when canola futures is close to a peak or has peaked?

The good part of your strategy is that if cash prices rally up and then drop down to $9.00, you're going to pull the trigger. That's discipline which is all too often not there. Hopefully a coffee row neighbor won't make you second-guess that decision.

Ball to your court. Grin.

[Kasro]

Lee,

Thanks for your response! Isn’t it much more fun to be marketing canola (and other commodities too) at a time like this, when you know you can cover your costs even without a good plan? And what you are able to do is MAXIMIZE profits! It’s a lot less stressful than trying to figure out IF you are going to cover costs, when the market is chronically low with no hope of a rally before your bills are due.

The point I’m making is that I think one needs different strategies for different situations. I often hear, again from the gurus, that you should a) know your costs, b) determine your break-even price, and c) sell when it reaches that level! Well sorry, I can’t do that. At least not all the time, or I’d still only have the ¼ section I started farming with! Breaking even ain’t no fun, and doesn’t provide anything for future growth. Growth occurs, for me at least, with a combination of my own capital, with some debt. I can’t, or won’t, do it all with debt. I’ll do the break-even skeet shoot when risks are high, and when market fundamentals suggest there is little opportunity for any price appreciation in the foreseeable future.

But, at times like now, when prices are significantly above break even, I need to maximize my profits. There’ll be enough break-even years ahead to deal with then. And it will make it easier to do then, if when I get the chance to meet my boat at the dock, I’m there. I don’t want to be at the bus depot, or on my way back home!

So, for now, I’ll pick a level I won’t let myself go below, and let the market run. Probably not with everything, but with a good portion. How will I pick the top? Well, Lee, I ‘m not going to even try. Top and bottom picking attempts have humbled me far to often to admit to anyone that I’m waiting sell then! I’ll watch fundamentals, keep a dialogue going with all potential buyers (with a bit of a skeptical ear, trying to sort the wheat from the chaff), and pull the triggers when a combination of gut feel and brainy calculations tells me to! And then try not to look back!

Occupying my mind now is the following scenario. I’ve got some 2001, 100% 2002, and 100% of 2003 canola to sell. I’m thinking I might want to reduce these all to 0% by March-April. But I’m not letting anybody hold me to it. The sands will likely keep shifting, and I’ll need to keep my balance. So lots to do in the next 5-6 months.

BTW, I have locked in some good basis levels for Feb del. I ain’t really doin nuttin!

Bounce, Bounce…:>)

[melvill]

Vader, looks like you've got your eye on the ball - chuckle.

One question, though, about your play book. Does that book include quality market information, strategies and outlook? My experience is that too few guys/gals, that are becoming astute marketers, get good quality market info to help them make their decisions.

Anyone wanting to see what's out there for market info go to:

http://www.agric.gov.ab.ca/newsletters/market_clippings/index.html

and have a look.

Maximizing profits has long been considered the business manager's goal. Trouble is, when prices change nearly every minute on nearly every day, we don't know if we've mazimized profits until the prices are history so they can be analysed.

Jump shot . . . . . swish, no rebound. (Gee, something that was so easy in my high school basketball days, plays me out just thinking about it.)

[Kasro]

Vader?

PLLeeaaase!

Don't go long when you mean to go short!

SLAM DUNK!

[Kasro]

New serve Lee!

Yes, I use the best information I can find. Some is paid for, some comes free. The internet is a wonderful resource. And thanks for the links. I checked them out and found a couple of new ones to bookmark.

Maximizing profits. Hhmmm. Ok, you're right. Can't know for sure if profits were maximized until after the fact.

But, I think you get a technical foul here! If I didn't say it clearly, you know I mean that I am managing with a goal of maximizing profits. Nobody can get every last penny that would be available with hindsight!

So, I hope we can we get and keep a discussion going here, sharing and discussing relavent information as it pertains to price levels and direction? How about it Mr. Moderator? I'll play!

Seasonals at least, say there is a good chance of higher prices ahead.