An interesting tidbit on canola

[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.

[charliep]

SCREWED UP - WILL TEACH ME TO COPY, PASTE AND MODIFY

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 $8.73/bu. (NOT $6.73 IN PREVIOUS) in the fall calculation. Payment/acre increases to $87.30 (would have been $77.30).

[TOM4CWB]

Charlie;

I would much rather have the Spring Price Endorsement(SPE) work as the Revenue Insurance (RI)does....

Think about this for a second...

We could have a 50/50 risk share on the SPE and the RI portion would remain the same.

Example;

Canola is worth $7.73/bu... spring price...

If the price drops 8% or $.60/bu... the SPE would pay $.30/bu.

If the price dropped below $6.69... the RI coverage... then the second 50% would kick in.

Let us say that the price went to $6.00/bu.

$6.00 to $6.69 50% of the owing 50% would be paid by the SPE... giving 75% of the $.69/bu or $.51/bu... plus... 50 % of the $1.04/bu ... or $.52/bu more.

THe total payment would then be $7.03/bu

On a year when the drop was only 8%... say $7.11 then the SPE payment would make back 50% of the lost 8%... or $.31/bu for a total of $7.42/bu

THIS type of system should be more reliable and average income better over the long run.

The all or nothing 10% deductable attitude of the present SPE is a gamble in itself... I don't really understand the logic!

Wouldn't Crop Insurance be smart to talk to farmers in the Safety Net Coalition a little before rolling these new options out?

[TOM4CWB]

Crystalball on Canola: Caution is advised on hedging, options and basis contracts until at least late April. Moisture conditions and # of seeded acres are very much in doubt as we write this and need I mention World economics. Oh a small war is on two horizons.

My advise is to hold any decisions until some smoke clears. My own personal strategy is to hold until I know there is a good chance of a crop to market ( maybe late july) and then place some GPOs with a reasonable markup on the fall price.

I can't see gambling on a hedge or a basis anytime this year as I see the large carry at this point as being alot of low grade crop needing a blend to be marketable. Options are very tricky unless you have a understanding of how they work like Tom4cwb does. Options work far better for buyers of grain than for sellers. To work options right your shouldn't buy a put or a call without selling in the opposite direction. Basis is like 60 day storage tickets the buyer knows he owns you' and that knowledge will weigh on the market if enough basis contract is done by sellers.

If more farmers would ask for a price (GPO) rather then taking a price we could push the market some.

Look for $8.50 canola come the fall.

Flying by the ass of my pants. The Kernel's Marketing Club, membership one

[TOM4CWB]

Crystalball on Canola: Caution is advised on hedging, options and basis contracts until at least late April. Moisture conditions and # of seeded acres are very much in doubt as we write this and need I mention World economics. Oh a small war is on two horizons.

My advise is to hold any decisions until some smoke clears. My own personal strategy is to hold until I know there is a good chance of a crop to market ( maybe late july) and then place some GPOs with a reasonable markup on the fall price.

I can't see gambling on a hedge or a basis anytime this year as I see the large carry at this point as being alot of low grade crop needing a blend to be marketable. Options are very tricky unless you have a understanding of how they work like Tom4cwb does. Options work far better for buyers of grain than for sellers. To work options right your shouldn't buy a put or a call without selling in the opposite direction. Basis is like 60 day storage tickets the buyer knows he owns you' and that knowledge will weigh on the market if enough basis contract is done by sellers.

If more farmers would ask for a price (GPO) rather then taking a price we could push the market some.

Look for $8.50 canola come the fall.

Flying by the ass of my pants. The Kernel's Marketing Club, membership one

[rain]

Kernal you are not right on the basis action all the time. In Canola this year since harvest booking basis and being forced to deliver has been paying $10-$45 dollar premiums over the cash. You do not like basis contracts I have noticed this in your wrightings. I find GPOs strange. All have there places though.