Rolling 02 to 03 Canola

[TOM4CWB]

Charlie;

I see marketers are starting to settle up undelivered prepriced Nov 02 Canola, and some are offering to roll to Nov 03 with reasonably favourable terms...

This will help deal with immediate cash shortages... and may not be that bad an option?

[charliep]

What are the costs of rolling the hedge? How is the $56/t (today) inverse handled?

[TOM4CWB]

Charlie;

When rolling ahead, usually the market has carry, and that carry is subtracted from the roll, the hedged product becomes worth less.

Now if we have the inverse, the negative carry gets added to the difference, and the amount of loss on the prepriced grain becomes less.

Do you understand what I am working towards?

[melvill]

Tom are you saying that rather than have producers pay a cash penalty for not deliverying, the buyers are offering to roll the tonnage forward for fall 2003 delivery? Today (Oct 29) the inverse between Nov 02 and Nov 03 is $56. Are they offering a price that is $56 lower plus or minus any basis change, for next fall delivery?

[TOM4CWB]

Lee,

THE explanation is that the rolling ahead does account for all the futures difference between the hedged price and the buyout futures price.

The pain of paying out cash, now, is taken care of, the price is lower when delivery occurs next fall.

[melvill]

So Tom, your gut reaction. How many producers in your area (what percentage) are likely to to go for the roll? What it boils down to seems to be which will be scarier: paying the non-delivery penalty, paying up for seed for next year or that chance that it won't rain again next year?

BTW does this rolling opportunity apply to unpriced basis contracts or priced contracts?

[TOM4CWB]

Lee,

Almost without exception, farmers are rolling to Nov. 03 contracts.

Basis contracts are all easily cancelled, with no penalty that I have seen.

One advantage may be that a rolled priced contract usually involves a admin. cost to buy it out. The roll stops this charge... plus frees up cash flow now.

THE Canola marketers we deal with, without exception, have been extremely easy to deal with on the contracted prepriced Canola we could not deliver!

[melvill]

Farm managers need to be a little careful about knowing and understanding the fine print on cancelling unpriced basis contracts. Usually if delivery on an unpriced basis contract isn't possible, there is no problem with cancelling if, and I said if, basis levels have widened. This year though two things have happened. Current basis levels are narrower than when the basis contracts were signed some months ago. And, the buyer I talked to really wants the seed. His point was 'why would I offer a basis contract if I didn't want or need the seed?' This buyers is going to be tough on people who can't deliver.

He may be the only one, mind you. Tom I hope the companies you've talked about are in the majority 'cause if many of them take the tough line, it'll set marketing management back a lot of years in the minds of many producers.

[TOM4CWB]

Lee,

This is where competition changes a marketing system.

Canola marketers need to satisfy the needs of farmers, to have farmers grow Canola in the future.

I know much has been done in my Canola business, by word alone, without signed contracts.

Honest people who trust and respect each other can work through any problem. If both sides are genuinely caring for the other partner in this relationship, it will work for the best, even in the hard times!