This is what I've been talking about

[blackpowder]

Timely. I read that DTN article 3 times.
I think the message is correct. Some of the best
decisions we make are the ones we are forced into.
Paradigm shift? Perhaps not. Last year I used little
storage as $0 basis locked very early. This year
opposite. Pricing future months, storing and again
doing creative basis stuff.
I see companys here leaving posted basis high and
cherry picking low basis bids as they see fit. As
mentioned in article.
The worst decisions Ive made in last few years was
by using old processes.
And finally, what in the hell is wrong with "thinking
like a grain company" ourselves!??

[mcdon]

JD,

Nothing personal but you are not giving producers
enough information. In order for your strategy to
work, you must still establish a short futures
position. Given the extreme volatility of the markets
over the past 10 years, the strategy used to
determine that entry level will have much more
influence on determining total revenue for a
producer than trying to capture the carry in the
futures. Case in point; selling canola at $400 and
trying to capture carry does not make up for
opportunity to sell at $550 last summer. Same goes
for corn this year, wheat as well.


For your strategy to work you must have a
functioning futures market. If you would have tried
your strategy using oat futures it would have been a
complete disaster. MGEX wheat has the potential to
become a disaster over the next 3 months. This
really only leaves one contract, canola, and the
viability of it is questionable given what has
happened over the past 2 weeks. Open interest
down 44,000, tells me that an elevator company is
buying short back, result is spreads have defied
logic and narrowed. Point is it is difficult to
formulate a business strategy that is affected by the
whims of one other trader.

Assuming you can find a futures contract that
provides a suitable hedge and you establish a short
position, that position must be maintained. No
problem if market is going down like fall of 2012,
but what happens if for example the Russia/Ukraine
issue blows up, you are short the MGEX wheat, it
goes through the roof and there is no guarantee
that basis will narrow... what the market refers to as
a "wreck".

In order for your strategy to have any credibility you
must first have futures contracts that work. Using
US based futures for Canadian grain is like playing
russian roulette, you can get away with it for a while
but when it doesn't work it can take back any
profits that you previously accumulated...I think this
is what is happening with you with wheat this
year.Finally, suggesting that there is "gobs of
money to be made" is misleading. You have to be
very careful about making those types of
statements re futures, very srtict rules and
regulations about that kind of thing.

[bucket]

Most of these strategies will work but the system as whole has to function.

Grain companies throwing out bids that are still a buck behind north dakota elevator bids show the system in Canada is ****ed no matter who is running it. I doubt the grain companies even use futures to buy grain , it is an easy double from mid point sask to port.Buy at 5.50 and sell of the west coast for 11.00.

The elevators have guys signing just to have a delivery opportunity in a plugged system, prices can't go up when that is happening. It is perpetuating a high basis.

But on farm storage for me would be another payment, there has to be income from the crop to pay for it all.

I think depape strategy works if you are wealthy and can afford bins, some losses (that he hasn't alluded to yet) and wait for your money to refill the estates money most are living on.

vvalk says a 100000 bushels only costs 180000 all in. Plus the electrical bill every year for usage, plus an auger and a tractor to run it.

And since we are all trying to be a grain elevator, every time we elevate grain we have to assume there is a cost in doing so. At a minimum on farm storage cost two more elevations. What are elevations costs at a primary now?

We have to charge those costs just like the elevator does.

[jdepape]

mcdon:

Last Oct there was a 50c/bu spread between spot cash prices and prices for April/May delivery. Although based on Mpls futures, anyone could have locked in a 50 cent "storage premium" by selling their wheat for Apr/May delivery instead of spot - $6.50/bu instead of $6.00. I talked a lot about last fall and did not meet one person who even considered it.

No futures position involved - just selling for a different delivery window and capturing the premium. Zero market risk - zero margins.

Comparing "selling at $400 and trying to capture the carry" with the "opportunity to sell at $550 last summer" is comparing apples to oranges.

If selling for $550 last summer (I assume you mean for fall delivery) was the "opportunity", then do it. It doesn't mean you can't also capture the carry later on if there is any.

In July - sell Nov canola at $550
In Oct - roll the Nov to the Jan at a $10 carry.
Repeat as necessary. As soon as the market doesn't pay to roll, sell the cash.

As for Mpls not working this year, you're right. But watching the cash basis in the US, and seeing the RR fiasco up here unfold, it was prudent to roll early (which we did) - all the way to the July. We got the carry in the market at the time, which was less than we thought before the RRs screwed the market.

The factors making the futures markets "non-functioning" this year have everything to do with the transportation problems. Just one more reason we need to get the RRs working properly.

I noticed the May canola in the last week or so as well. Still trying to get a handle on what happened but not so sure its "questionable". It goes beyond a short running for cover. Almost all the outstanding delivery paper was called for shipment. Whoever owned it has converted it to cash and is shipping it. When basis is so low (weak) this defies logic. Unless - you look at track Vancouver prices which are much higher (now at 45 over but as high as 80 over not that long ago). The only thing that makes sense to me is that they are shipping it to an export sale made at higher levels. If they are shipping everything they can out of their elevators, maybe it makes sense to add to your shipping by shipping out of someone else's. We're in new territory here with the railroad-induced backlog cluster; it's a grain merchant's job to find ways around roadblocks and it could be that who ever did this is brilliant.

Or an idiot. I haven't made up my mind yet.

Regardless, it is concerning. And if I was short the spreads thinking there is no risk of futures paper going anywhere, and then saw it disappear, I'd be getting out pretty quickly as well. But if as you surmise it was an elevator company covering shorts, why wouldn't they just deliver against their short (which at least one did).

But there's another angle here too. Maybe, just maybe, there isn't as much canola out there as some people think.

As for the gobs of money comment - not misleading at all. But you seem to think I mean from trading futures.

Let's say at harvest the crusher canola bid is 50 under and spreads all the way out to July are 75-80% of full carry - and likely to go further as time goes on. The crusher loads up because so many farmers just want to move it, keeping basis low.

The crusher is happy to buy - in fact, over the years they've added storage to "help" you out.

But when they are "helping" they are buying at 50 under, canola that they will crush later on - when the spot market is more like 30 under - or even 20 under. And, in addition, they have picked up the carry - let's say, another $30. Using this math, they own canola at the equivalent of $80 under (50 plus the 30 carry), when the market is more like 20 or 30 under.

In this situation, buying at 50 under is what we call "good ownership".

Farmers should not be selling at prices that are "good ownership". Instead of selling at 50 under at harvest, handled differently, farmers could be getting the equivalent of a zero basis (30 under cash price plus a gain of 30 in carry). If $50/tonne isn't gobs of money, we have different definitions of what that means.

And you're right - of course this isn't "enough information". I've written a book on this stuff and when I showed it to a long time colleague, he said "holy crap - in one book you're giving these guys what it took us 15 years of trading to learn."

I'm not trying to teach people anything here - I am just encouraging them to think differently about the market.

I appreciate your comments because as I try to make explanations simple, I run the risk of making it seem like a slam dunk, which it isn't.

But I maintain, it sure makes sense to do things differently than we have for 60 years.

[bucket]

Here is the sad part of the story.

Had the cwb been paying farmers for storage instead of the grain companies for the last 60 years the whole industry would be better off.

[jdepape]

you're absolutely right - a terrible misuse of the whole grain handling system.

[mcdon]

JD,

Re your book, how did you address the issue of VSR ?
Could be a whole chapter in itself,

[jdepape]

When we redesigned the canola contract we were
grappling with the issue of convergence - same
issue CME was addressing when they came out
with VSRs.

When designing futures contracts with physical
delivery, the trick is to make delivery against
futures (leading to storing grain) as attractive as
shipping grain (meaning turning inventory) - or at
least close.

When we redesigned the canola contract I lobbied
for large storage rates - I suggested 0.15/t/day.
The exchange went with 0.10 and later increased
it to 0.12. (I'd still vote for 0.15 - or go with VSRs.)

The more carry you can get into spreads, the less
will end up in basis. And that's a good thing.

VSRs do the same thing - but only when needed.
I like the concept.

Great topic for a second book.

[jdepape]

VSR = Variable Storage Rates

[blackpowder]

great topic. what aville is for.
on a lighter note. i told my banker to hold her breath
until march next year.

[bucket]

Did they get her to the hospital in time??? She should have stroked out on that comment!

[mcdon]

There should be an equilibrium point with respect
to the amount of carry in a spread, too much and it
discourages a long position that is rolled forward,
e.g. when VSR was introduced it served to push
spreads to excessive levels, I remember buying the
U/Z spread at 50 cents. extrapolate that over the
course of a year and that is $2.00. For a fund
carrying rolling a long position, it makes it almost
impossible to realize a profit. Extrapolate it over the
course of 5 years and the long owns$17 wheat. This
was the death knell for Duetche Bank. On the flip
side, this is where the strategy of capturing the
carry in a spread works for a short position. VSR
wouldn't work for canola, no guarantee that basis
would narrow, not enough competition in market.
Expecting basis to narrow is giving grain cos. more
credit than they deserve.