Watch the Canola Carry

[errolanderson]

Growers . . . keep an eye on the spread between ICE canola months. March canola appears to be trading $12/MT plus premium over November. Also, basis levels improve for early 2017 movement.

If you decide take advantage of the carry plus better basis and sign a 2017 DDC contract, you can always purchase a canola call option to re-open your price ceiling for the spring market.

Note: Cost of the call option reduces your risk to the value of the premium only. Plus no storage issues or margin call risk.

[farmaholic]

Ok Errol.... if everyone unloaded(contracted) their canola on spot, DDC, or basis/futures first contracts...... what are the chances of the market going higher and there being any value to a call option. There is risk in holding physical canola(price volatility and going out of condition)..... but as long as you're in control of it, the market has to work to pry it our of your hands.

Preselling unharvested and contracting harvested grain has it's place but if everyone just dumped it to unload risk..... prices would never go up.... it just cheapens the whole market price for producers.

[Hopalong]

Can remember similar complaints about gold miners taking hedged position on future production.
Think the ones who hedged came out ahead, may have delayed price increase for those who did not hedge.

[farmaholic]

Instead of force feeding the market.... give it enough to stay alive. Keep it hungry....not starved, but hungry. If that means maintaining control of the grain in the Primary Producer's hands... so be it.

Commercial stocks never matter? Whether in their hands or on paper.... damn right they do.

DON'T GIVE ALL YOUR POWER AWAY!!!!

[MBgrower]

Right on farmaholic.

[macdon02]

I'm in the swather at the moment but does anyone have the formula for cost of carry? I wrote it in permanent marker on my white board in the office. Roughly speaking I figure 10% of cash price per month. So $10 canola is gonna cost you a dime a month plus risk of heating etc etc see above.

[jcv]

I'm in the swather at the moment but does anyone have the formula for cost of carry? I wrote it in permanent marker on my white board in the office. Roughly speaking I figure 10% of cash price per month. So $10 canola is gonna cost you a dime a month plus risk of heating etc etc see above.

Not being a stickler, but 10% of $10.00 is a dollar? Is it 1% / month?

[farmaholic]

...and I think everyone's cost would be different as is cost of production.

[farmaholic]

This analysis is a call for help....

Nov-$469.20 Mar-$481.00 May-$485.00 (Friday's Close)
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March Calls

Nov-Mar futures spread $11.80

Mar-$481.00 spot

$500.00 call cost $16.20 minus $11.80 spread makes the call cost $4.40
$525.00 call cost $9.80 minus $11.80 spread makes the call cost -$2.00
$550.00 call cost $5.90 minus $11.80 spread makes the call cost -$5.90
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May calls

May-$485.00 spot

Nov-May futures spread $15.80

$500.00 call cost $18.70 minus $15.80 spread makes the call cost $2.90
$525.00 call cost $11.40 minus $15.80 spread makes the call cost -$4.40
$550.00 call cost $7.00 minus $15.80 spread makes the call cost -$8.80

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There is actually a gain in the cost of the call for the higher strike price.
A March $515 call would pretty much offset the Nov/Mar spread
A May $510 call would pretty much offset the Nov/May spread

This doesn't take into account the variability of basis from month to month
or delivery point to delivery point.

What is the potential for the canola market? $550/tonne is about $12.50 without basis....

There's got to be a computer program for this stuff.

[farmaholic]

To me, sometimes the costs or lack of gain hardly makes the effort worthwhile.

Am I seeing this correctly?

[farming101]

Yes I see you rationale for incorporating the option premium into your deferred delivery contract.

One thing to remember with options is that unless there is a huge runup in future prices a call option is going to lose value the nearer it gets to expiration and the longer it stays out of the money.

So, if one is trying to leave their opportunity for a better return open by buying a call, it may be better to buy an at the money call. They are more liable to move dollar for dollar with any rise in the futures.
They also are a lot more expensive.

To offset this a guy could do a 2 for 1 if they want to buy a cheaper option, or they may buy an in the money call and sell an out of the money call to lower their cost.

All of these ideas are to limit or offset risk. If a guy can't afford to accept a low price(if cash prices really tank in the future) it's a great strategy. Some tactics increase the chance of a better return but do put a limit on it.

This little comment doesn't tell you much really. The book on options is pretty thick.

[macdon02]

Sorry 1% My brain skipped

[errolanderson]

View the sell the carry and replace with a call as a strategy to reduce your price risk, while still being able to take advantage of a futures price recovery.

Farmaholic, you make good points. I may get booed for this statement, but through my career, the biggest mistake producers can make is; storing unpriced too long in the bin.

Call replacement strategy reduces this risk as your cost is limited to the value of the call, not a whole bin of unpriced grain.

No one knows where the spring market for canola will be. But to me, the recent sell-off placed canola in a technically oversold position. We have seen a nice rebound ($30/MT) off these lows.

One thing for sure, there is tremendous demand for Cdn canola. This will trigger basis premiums in the weeks ahead regardless of how big the crop is.

Growers will dig in forcing buyers to sweeten the basis pot, even if bins are full. Good discussion and great comment from all . . . .

[macdon02]

Production cost I'll argue is irrelevant to cost of carry, it's the same whether you have 500 or 500000 bushels. Think of it as the opportunity to do something with the actual money rather then holding a physical asset. With low interest rates I know it doesn't seem like much but it is real. I been using 4% lately. Until you realize one needs to gain a dime a month holding till post seeding requires $.80 gain over selling into the harvest slot. Does anyone know where seasonal charts of canola basis is available? Preferably for free?

[farmaholic]

Someone please answer this.... at what range is a call considered "in the money"?