Canola now what

[farmaholic]

$12/bu commodity canola....will it keep a lid on a higher price? Bin doors will open and they would get what they need. If the spring is hot and dry...what's possible? Does the recent dip in the futures lower your expectations or is it psychological market warfare/torture.

[errolanderson]

New crop price protection: For growers starting to scale-in new crop canola price protection, here's an put option idea that catches our eye . . . .

A January $520 put option is now trading around $20/MT.

Jan strike price $520/MT - $20/MT premium = $500/MT ($10.88/bu) - your fall delivered basis.

January options expire near Xmas.
Advantage of Jan puts over Nov is a growers might be able to secure a better delivered basis under Jan.
Also, the owner has no production obligation. No risk of payout penalties if unable to deliver.

[farmaholic]

New crop price protection: For growers starting to scale-in new crop canola price protection, here's an put option idea that catches our eye . . . .

A January $520 put option is now trading around $20/MT.

Jan strike price $520/MT - $20/MT premium = $500/MT ($10.88/bu) - your fall delivered basis.

January options expire near Xmas.
Advantage of Jan puts over Nov is a growers might be able to secure a better delivered basis under Jan.
Also, the owner has no production obligation. No risk of payout penalties if unable to deliver.

But Errol, GrainCos were offering $11.00 for Jan/19 DDC. I bet they call that contract in early...maybe not off the combine though.

[errolanderson]

But Errol, GrainCos were offering $11.00 for Jan/19 DDC. I bet they call that contract in early...maybe not off the combine though.

Farmaholic, put option protection generally offers slightly lower return than fall DDC cash contracts, but there is no production/delivery obligation. No margin call risk. We suggest growers start with DDC contracts up to their comfort level and beyond that start scaling in put options.

My favorite strategy is to scale-in put options into a raging bull weather market, should it occur. No one knows where the top is. All we know is there is a peak and then sudden drop. There is a risk to signing a DDC contract as your own production may be threatened.

Realize this is now water-under-the-bridge, but this put option strategy was a very effective strategy during the 2017 run-up in Minneapolis spring wheat. Some growers cashed in-significant gains and protected profits with just lonely put options.

[farming101]

It's insurance.
To speculate, load up on cheap out of the money options. Treat them like penny stocks and see what happens

[farmaholic]

Thanks for your input. But deduct an average basis from that price and it doesn't excite me much. Another 20$ basis deduction leaves me a bit under $10.50/bu.

No one can predict what the basis will be but what's your opinion of an average Jan basis?

Edit.

Just checked some local bids.... Nov $10.90-10.96. Jan $$11.00-11.12 Basis...fall months $31-37(ouch for now--looks like we might be paying for someone else's "insurance"...lol)

[errolanderson]

Thanks for your input. But deduct an average basis from that price and it doesn't excite me much. Another 20$ basis deduction leaves me a bit under $10.50/bu.

No one can predict what the basis will be but what's your opinion of an average Jan basis?

Edit.

Just checked some local bids.... Nov $10.90-10.96. Jan $$11.00-11.12 Basis...fall months $31-37(ouch for now--looks like we might be paying for someone else's "insurance"...lol)

farmaholic . . . good comments. Every farm operation is a different risk appetite . . . may depend on debt load. Some operations are quite aggressive with options, some don't use them at all. There is no right or wrong answer.

Remember, if you are using puts for price protection, the best case scenario is to watch them expire worthless. If they expire worthless, how high did the cash market go? That great news. But if the market turns grumpy, put options can be profit-savers. This is your own 'pure managed price insurance', without government involvement. You are the boss and have total flexibility . . . .

[farming101]

This is only for reference and is not based on actual elevator basis(and I haven't updated for a while but it is based on a ten year period 2007-2016):

Average SK basis for delivery in Nov/Dec is -31.30
Best basis was +12.83 in December 2012. Cash price was 599.33
Worst was -68.40 end of December 2010. Cash price was 508.90

Average cash price over the period was 450.55

[furrowtickler]

Seen this , I know it’s been dry in Argentina but .....

[errolanderson]

Soybean fundamentals and focus are now nearing a shift (IMO). Focus will now shift toward the U.S. from South America. U.S. soybean acres will likely exceed corn this spring, (the 1st time ever) possibly exceeding 92 million acres. If yields are similar or exceed a year ago, this will swell U.S. stocks-to-use ratio possibly above 15 percent.

Some U.S. analysts are now projecting soybean futures to once again break below $10 per bu under these circumstances. This scenario would also impact new crop canola . . . .