pricing canola gimmick

[rook]

hi - one grain company is offering to take canola now at $20 over July futures. You can price anytime or if you priced today it would be about $13.50. What are the pros and cons of such an offer? Obviously, delivering now and still being in the market is favourable but I'd like some thoughts from some experienced farmers...

[charliep]

Just curious what they will offer you today/spot market (price and basis). I would be more comfortable picking a cash price/pulling the trigger when achieved.

From there what do think will happen to old crop futures month spreads? July is at a $10/tonne inverse to March so they are really only paying $10/tonne to store for 6 months (assuming you hold to the summer).

[charliep]

If I read, I would have had an answer on the cash price. My question would be what your target price is and when do expect to see it?

[bgmb]

what is their spot basis? it should be 10 over if
they are offering you 20 over off july. july is
trading at a 10 dollar discount to march so you
should gain 10 dollars a tonne if you take a spot
basis and roll to july futures.

[farmaholic]

Rook and others: Would I be wrong to
assume if everyone marketed their grain
this way the buyers would never have to
bid up the price because they already
have the product and wouldn't have to
bribe you to open your bin doors? I
realize there is storage risk but I
never liked those programs where you
deliver now and price later. Don't
surrender any more power(marketing or
choice) to them than you have to. They
always try to make it sound like the
best thing since sliced bread. Explore
all your options. I don't trade paper,
maybe someone else can help you there.
Good luck with your choice.

[rook]

thanks for the replies.

yes their spot basis is 10 over. While $20 over july sounds good I believe last year in July there was 60-70 over when they were in a pinch.

[rook]

bgmb - don't you have to pay admin fees when you roll futures? I would think that could eat up $10 pretty quick with a couple rolls.

[bgmb]

if you roll when you make the contract there
should be no fees. Who knows where basis will
go from here I would be more inclined to go off
the may futures instead of july. July can get
dragged down by new crop which right now is
trading at a deep discount,

[bgmb]

i personally feel if futures stay flat basis will
continue to improve if futures go up basis should
stay about where it is. I don't think there is any
chance the yorkton/harrowby crushers will buy as
much canola to keep them going full steam until
september. One would think that would mean
basis will continue to improve.

[errolanderson]

Realize this is in hinsight, but it would have been better to price the cash canola in the fall and replace with call options?

In this strategy, the grower injects cashflow and then is only exposed to the value of the call option premium. If canola rallies, you are on board.

But if canola doesn't rally, losing the value of a call option is a lot less painful than watching the futures drop.

Not a fan of the July basis contract as this is a poor demand month and already inverted to May (as Charlie mentioned).

[dave4441]

Hmmm... dont think it was hindsight Errol as i believe you were suggesting this as stategy last fall but everyone was a bull!!

[Hopperbin]

At the moment here I am left with some bins of Canola. I know all about rolling and rolling untill your screwed. Guys ask for a basis contract that you do not have to roll. Make it for the month you deliver. Is that too simple or is that too simple.

[Hopperbin]

Errol what I would like is a basis contract that I can deliver up until next Dec. is there such a thing??

[Hopperbin]

ADM watson had a deliver now price untilll end nov. but am sure it was a screw job. The basis should not have to be rolled.

[errolanderson]

Hopper . . . basis contracts can be effective, but they have to be managed.
If not managed, they are simply just prograstination contracts.

Basis contracts strut-their-stuff when the futures are in a squeese. Then every dollar the futures roar up, the cash price follows. But if there are no targets and the futures fail,these contracts are simply boat anchors.

Personally, not a fan of growers signing July canola basis contracts last fall. July is a poor demand month to tie into. It offers time, but so what? The price party may long be over by then.

Personal opinion . . . don't roll basis contracts. If you are rolling basis contracts, you badly need a commodity trading account.

Not sure why you would want a new crop basis contract for old crop in this market environment? Your net return would be sharply lower as new crop market are sharply inverted.

Hopper . . . give me a call. I'd like to help you out with some ideas.

Errol

If you really have an urge to stay unpriced into fall, don't preprice your new crop. Or scale in some December corn call options. But this is not risk management (IMO).