An interesting tidbit on canola

[TOM4CWB]

dnach;

10-4 on the specialty contacts!

I am going to use the price stabilisation system on Crop Insurance as my risk management for the 80% my CI Policy will cover.

I agree that without a fair act of God clause, I won't sign anyones DDC or Basis contact.

My normal Canola buyers have been real decent... they include Cargill, Agpro, CanAmera and Pioneer. Everyone of these buyers has dealt very fairly with our farm in the past... I appreciate their good faith in looking out for us!

[melvill]

dnach, as bmason says, "Some of us need to be shook from time to time with a wake-up call!" Certainly lots of people are gun shy about forward contracting this year after last year's problems.

However, one way to cover part of the price risk without making a commitment to a grainco or crusher is to hedge using futures. Hedging requires having a futures trading account but it's another tool in your marketing tool box that we all need to use. Certainly if the market were to go much higher at or after harvest and you have no canola you'll still have to buy your way out of the hedge but the cost isn't as high as buying out a grainco or crusher DDC.

Finally, it all depends on perspective. I had a canola grower call me a week ago who is going to contract 25% of an average crop, before seeding, if the opportunity arises. He told me he is generally an optimist. Sometimes I think we get weighed down by pessimism or, as my wife's uncle calls it, "coffee shop gloom".

[rain]

mellvill if your producer is south of highway #1 this is probably a good thing. If this producer is north of highway #1 all he should consider is a basis contract. Unless he has a hedge account and get long if drought returns.

[dnach]

melvill, good point, but explain the costs involved and this advice might have been better anounced in December for those who needed it, hindsite is 20/20.

[melvill]

dnach, your point about new-crop hedging advice in November and December is well made. However, Charlie and I have been very hesitant about giving direct marketing advice on this forum even though occasionally we have suggested when producers need to take notice of certain situations. We think our role is to moderate and encourage discussion.

That being said, the cost of setting up a futures trading account isn't very high. A potential broker will want piles of paper work detailing your financial situation. He'll probably want an assignment on your first-born to make certain you don't skip out on a losing trade! Once that's done and he sees that you aren't in dire financial straites, most brokers will want a cash deposit as a sign of good faith. The amount of that deposit varies from company to company. Brokerage firms that don't want to deal with "small" traders like farmers will make the deposit really big. Those that want to deal with farmers will ask for a smaller deposit. The deposit is refundable if you decide not to trade any longer.

Contrary to popular misconception, the actual cost of trading one futures contract - 20 or 100 tonnes of, say, canola, is roughly $1.25 to $1.50/tonne to get in and out.

If you're interested there's more info on choosing a broker at

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

under "Choosing a Commodity Broker"

[TOM4CWB]

Lee;

Trading is all well and fine...

Hedging is another matter... because 85% of farmers don't understand the difference between "speculation" and "risk management".

Buying puts and calls has ended up being my main way of creating a true "risk management" strategy...

For instance... if it turns out this Canola market is drastically oversold...

Buying some out of the money Calls...

Then being patient and waiting for the spring planting rally...

Then going short against the calls when the futures is higher than the strike price of the call option...

Is one of the most effective strategies in actual hedge management... with affordable limited cost if the market continues going south.

Or buying the new crop insurance price insurance option should do the same thing... shouldn't it?

How come you and Charlie won't even comment on this... this will be the third time I have mentioned it... by the way!

[melvill]

Tom, this is a scarey situation - I'm agreeing with you . . . . yes I've run into producers who don't know the difference between hedging and speculating. They started out as hedgers and then thought they could beat the market - always a humbling experience. Then they say that all trading is bunk, which it isn't.

I seldom talk about using options because only a very few farm managers understand what they are and how to use them. Most guys I talk to go into "eye-glaze-over" mode when I talk about options. I agree that options can be a good tool when well understood and used properly. Trouble is volume at the WCE is a little thin.

I haven't commented on the new crop insurance because, quite frankly, I've been going full bore at work and I haven't had time to study it in any amount of depth. And evenings . . . they're the exclusive domain of my kids and finishing the basement . . . no time even for watching the Brier!

[charliep]

The variable pricing benefit (now a standard feature under crop insurance is a good tool to offset price increases on crops you have signed deffered delivery contracts for.

The spring price endorsement can be a good product for covering off the potential for lower prices this fall (acts like buying a put option 10 % below the current crop insurance prices with a major difference that triggering means you get everything). The covers production up to and including your crop insurance coverage yield.

I (like you) will have to see the premiums to evaluate. Both these programs have to be put in the context of a farms overall risk plan and to a certain extent market opinion.

Sometimes it is just as easy to listen and get others opinions. I look to others thoughts.

[TOM4CWB]

Lee and Charlie;

I am trying to work through a strategy for the Crop Insurance Variable option.. that covers downward price movement on covered production.

The Alberta Crop Insurance spring price for 2003 is set at $340/t farm gate price.

Now if I have this right, I understand there is a 10% deductable... which means the basket price must drop... more than $34/t... on average... in the month of October... or this price protection to cover me.

So if the basket price for October is below $306/t farm gate price... I get coverage at the $340/t level.

How exactly do I work a risk management strategy out on this system guys?

If I pay $7.50/ac for this coverage... wouldn't my supernisa cover this loss at a much lower cost than the Crop Insurance option?

THis 10% refundable deductable is insane to work with... how do we create an effective risk management strategy?

No wonder you guys don't want to think about it...

[charliep]

Just make sure you have the programs clear.

VARIABLE PRICE BENEFIT - Increases coverage level price if prices increase by more than 10 % on CI claims (same as varible price option last year except now a standard feature with crop insurance). EG. 22 bu canola CI yield 70 % level. Actual yield - 12 bu/acre. Crop insurance loss - 10 bu/acre. Current CI canola price $7.73/bu. Prices increase to $6.73/bu. in the fall calculation. Payment/acre increases to $87.30 (would have been $77.30).

Spring price endorsement - Pays out if prices decrease by more than 10 % on actual production up to crop insurance covered yield (any yield payment is based on higher price anyway). EG. 22 bu canola CI yield 70 % level. Actual yield - 32 bu/acre. Crop insurance loss - none. Current CI canola price $7.73/bu. Prices decrease to $6.73/bu. in the fall calculation. Payment/acre - $22 ($1/bu decline in price times 22/acre. To add more clarity, this program is effectively something like a minimum price contract with a grain company.

I won't go down the revenue insurance route - doesn't apply this year anyway as prices are above trigger levels.

I hear you about lots of opportunities (some better than others) to cover a farms risk. I hear your comment about lots of changes/new programs (some that are still being negotiated), poor explanation of them and no assistance in helping farm managers in putting them together in their business decision making.

Enough for now. I will leave for other questions.