Weather / Markets...

[furrowtickler]

Weather starting to drive markets today, Wed, Thurs look very cold into north Tex, as this cold air here goes a long way south by then behind the big low in the mid west.

[charliep]

It has potential to be a wild ride this summer. Your biggest fear however will be if things turn deadly boring. That is a sign the weather/Mother Nature are cooperating to provide average to above yields, other parts of the world have responded to high prices and the consumption side returns slowly after a period of high prices (mainly referring to corn/feedgrains).

If you are 100 % certain what the market will do and you can take the risk, go with your gut. If are uncertain, look at strategies like options/SPE in Alberta that lock in price for at least a portion of production.

[Daylate]

What is SPE IN ALBERTA?

[charliep]

Spring price endorsement. In addition to provincial
crop insurance, Alberta farmers have the ability to
add on an additional price insurance product that
guarantees a minimum price very much similar to a
put option. There is a premium cost that needs to be
compared to a put for crops with a futures
market/traded options but also available for crops
like pulses where these type of products do not exist.

The base price for spe is the spring price used in crop
insurance coverage. Using canola as an example, the
spring price for canola is $555/tonne or $12.69/bu.
If prices decline by more than 10 % next October
(below $510 or $11.42/bu, then a payout occurs to
make up the difference between the spring price and
the fall price.

I have left a lot of details out but that is the essence.
Can get into more details if you like. There is
premium which Alberta farmers will have seen/can
comment on. They have until the end of April for a
decision. They should be asking the question do I
need the price insurance taking into consideration
cost and how does the cost of this compare to other
minimum price contracts/alternatives like an actual
put option.

[furrowtickler]

My gut is telling me more than ever to be very cautious this spring in every aspect - we will be later seeding now. Not that maketers take much outa gys like Drew Learner - but he predicts a cool, wet start to harvest. 2004 brings back harsh memories, August frost that ruined a good crop.
It kinda pisses me off that every expert a few short weeks ago - again - was calling for record acres and record yeilds. Mother nature dictates...

[Daylate]

Thanks Charlie. So is this premium based on your
production premium. And if so on average is it
better than the cost of a put option, or is it designed
for a one stop shop type thing.
Damn we better get on brad walls back about some
real insurance. I'd be happy with spot loss hail like
Alberta too. Good to know those cross border
corporations are running on land beside us with
subsidized Alberta production and price margins.

[charliep]

The price insurance coverage does use the selected
coverage percentage used for actual crop insurance
with a further comment an Alberta farmer does have
to take crop insurance to qualify. Not sure how the
AFSC actuaries calculate the premium except loosely
based on options processes. The difference is
options premiums are established daily by the market
whereas the SPE is based on coverage prices
established in January, premiums set in February and
price expectations in April for a decision. Alberta has
livestock price insurance products where premiums
are set daily and there are more alternatives to
coverage percent.

Were set up for one stop shopping but there are a
number of crops for which no solid price risk
management tools are available outside rare and risky
to buyers deferred delivery contracts. Good or bad?
Talk to Alberta farmers. They have provided
protection against lower prices in the past with
payouts for at least some crops most years. An
Alberta farmer has to do the calculations both looking
a the protection offered relative to the cost and the
other products being offered (i.e. options such as
puts).

[FarmRanger]

Just a slight correction to your math on canola Charlie, the SPE for canola is 555/tonne,($12.59/bu.), but a 10% drop would be a 55.5 ($1.26) decline to 499.50 per tonne ($11.33/bu.).

With the $20 basis off of Nov. canola, this would comparable to a Nov. 575 put which is currently priced at about $33/tonne ($.75/bu.) My own farm's SPE premium works out to around $16.50/tonne (.37/bu.) which is about half of what a put costs, but is more flexible than SPE and is still worth something with less than a 10% decline in price. (Although I also get some premium discounts with AFSC that my broker doesn't give me.)

I guess SPE is more designed to protect against larger drops in price, and the Put is more of a hedging strategy with less risk than selling the actual futures. I might do some of each.

[charliep]

Thanks for fixing the calculation. My brain is still somewhat on holidays.

My strategy for this coming crop year at this point is that I can't forecast the future. With a hard core look at my businesses ability to handle lower prices and from there my sleep factor (i.e. which is worst - accept a price today and watch prices go higher or pass on current pricing and watch prices go lower). A personal decision but I would have pricing done on a portion of my crop ahead of this summer. That pricing may include strategies around minimum price contracts like SPE and options.

I note that Alberta (Variable price benefit) and Saskatchewan (variable price option) have ways of changing the price portion of your crop insurance cover in the case of a claim situation. This is also important as you look ahead. I think you Saskatchewan guys will have already made your decions on the VPO (March deadline).

[riders2010]

Must be nice to have until end of april to decide. Still Backwards here in Saskatchewan, Saskatchewan Party promised to change that.

[charliep]

FarmRanger

An interesting strategy from a farm friend several years. They used SPE to their crop insurance coverage (70 %) and an option strategy on the remaining 30 %. They had established a minimum price to cover 100 % of their crop insurance yields with the ability to review the puts/option strategy at various times over the summer (i.e. recoup some of the value). With their production history, they felt very comfortable in yields over crop insurance levels with the comment they would play the market on these. Expensive? Yes. Having said, this farming business made way more money than I would ever dream of. They had a strategy to make money and they executed their plan.

[ajl]

The problem with Hail endorsement and price endorsement in AB for
those outside the province, is that when your crop is totally
destroyed say by hail you only get your maximum indemnity. So if you
bought the endorsements then you paid more premium for the coverage
you would have gotten anyways. HE and SPE only works when you
produce more yeild than your coverage levels then you will receive a
portion of your indemnity and have the crop revenue as well.

[Burbert]

WOW The marketeers are bout to start
running wit the bulls, heres hoping that
nobody gets gored. Weather/markets are a
sure thing, eh! FHarperenRitz, while
going forward 2........