From the unexpected file, should a person be buying Canola Call Options here?

[farmaholic]

Sometimes it doesn't matter how much "market power" you possess...sometimes it works in your favor other times not. Greed and obstinance aren't good marketer qualities.

[bucket]

blackpowder, thanks for posting. Marketing is about all about discipline and solid business management.

Now Errol ...can you explain the close to 27 billion USD of marketing discipline and business management american farmers are receiving????


Canola is priced off the soybean market and that 27 billionUSD is affecting every one of our commodities here in western Canada....

Just keep burning equity boys....its all good...

[errolanderson]

Thoughts on option purchase whether puts (to guard price downside) or calls (to reopen price upside).

Buy quality or quantity? Typically, we suggest to growers to purchase quality meaning at or in the money options, if possible. Realize premiums are more expensive, but some growers have protected their crop with Nov $490 and $500 put options, back when they cost $15 to $20/MT. Out of the money options are cheaper, but you will need a homerun to cash them out in this lethargic market.

It doesn’t matter what commodity you pick, there are no homeruns to be had. To me, rallies like current corn should be viewed as a hedging opportunity. Trump’s trade war has severely messed up global trading patterns. We aren’t going back to the good old days anytime soon.

Many growers use options as it does help maintain marketing discipline (blackpowder’s post). There are no margin call concerns as a purchaser of a put or a call option. We have seen many times in our career where an option position was devaluing and appeared going to expire worthless only to spring back to life quickly. The problem with futures trading is; margin call grief can knock you out of your position at the worst possible time.

Hope this makes some sense . . . .

[bucket]

Could you explain the implications of the 27 billion?????

[blackpowder]

As a very small grain company, I use some of the same price risk tools the larger companies use.
It's not VooDoo. Just a self managed price risk insurance.
Sometimes I think because of our socialist/communist history, we are conditioned not to see clearly.

My account fills in down turns and drains in upturns. Over the long haul probably no difference if you never did.
But my current canola inventory is hedged at $500 and today, right now, I can use that extra cash. Secured while I needed to aerate and find a home for green ( shop basis). Locked in before the Chinese closed the door.
The cost of running the program likely isn't any more than to insure your machinery per$1000. Likely less if you write options. Small loss in a flat year.

This started as a marketing thread and turned into a group of witch doctors knashing their teeth over an eclipse.

[TechAnalyst]

For the benefit of those interested but uncertain, I think it should be pointed out that when trying to decide on the quality (and price) of an option, the motivation behind purchasing it in the first place should be taken into account.

If it is the primary tool for protecting against a price decline and you expect that very well could occur, a higher priced option with very good protection makes the most sense (as Errol suggests).

In the original post, if a deferred delivery contract was the protection against the likely weakening market but a call was purchased in case the outlook changed, you likely wouldn't want to purchase an expensive option. You are merely protecting against the unlikely event that prices rally and you want or need to be able to take advantage of it.

Risk management takes many forms and as anyone that had to buy themselves out of a contract in a rising market due to a crop failure knows, it can be very damaging.

[farmaholic]

After years of dabbling.
I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
I sometimes lock the basis.
Hedges are lifted the day I sell physical.
I do forward sell some. Sometimes a lot. This is kept out of hedge program.
Theoretically, I should have my startup cash in account upon retirement.
So far I have a reasonable excess.
(Markets downtrending last couple years).
You can hire someone to operate this if you do not have the discipline or comfort.

Or my obvious lack of knowledge.

[farmaholic]

Sometimes I think because of our socialist/communist history, we are conditioned not to see clearly.

Yup, that could be my excuse.

Before we started growing open market special crops, of which many had no active futures trading or options to buy, I had no need to know how the futures market and it's options functioned. We were even considered late to the canola growing trend.

All that said, there is no reason I couldn't have dabbled in the markets, I didn't have to own a ball to play the game.

In my "twilight" years of my farming career, is it something I really need to be doing?

I don't mind DDCs when quality and quantity are known.

I don't like basis contracts because I hate committing to one Company if there are multiple viable other Company options available. What appears good at the moment may not be later. But who knows!

Sadly I would say markets are completely dysfunctional right now, politics.....

[blackpowder]

I hate basis contracts myself. Lost potential when a "special" offered.
I use them mostly because I'm short storage. Guarantees off combine delivery without as much non delivery risk.
Reserves space until you can fill.
Basis changes naturally and can be an indicator until they "gotta fill a train" lol.
Grain is food and as such will always be 90% politics.
Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated.

[farmaholic]

Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated.

Good to know I probably never missed much.

[errolanderson]

I hate basis contracts myself. Lost potential when a "special" offered.
I use them mostly because I'm short storage. Guarantees off combine delivery without as much non delivery risk.
Reserves space until you can fill.
Basis changes naturally and can be an indicator until they "gotta fill a train" lol.
Grain is food and as such will always be 90% politics.
Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated.

Rolling basis contracts a huge cost to growers as grower pays the cost-of-carry between the futures. Rather than roll a basis contract which is nicknamed the ‘procrastination contract’ and if you are bullish, cash the cheque from the grain co and replace with a call option. Paying basis rolls is a heavy cost to the grower unless there is a sustained bullish market.

If you purchase a call and the market dives further, you are on the hook for just the premium of the call, no more, not the cost of the whole bin unpriced. Plus, grain storage can be more a liability than an asset. Move the grain, use your trading acct to manage your price management.

[farmaholic]

Errol, "Like" and "Dislike" your last comments.

Like the statement about rolling the basis and paying the cost of carry AND probably a roll fee as well. And how just buying the call can reduce risk/cost.

Really dislike the comment of "move the grain".....if everyone just did that there would be no need for grain to rally. Image if everyone just dumped their grain and used trading accounts. First affect would probably be a price collapse, then once all the grain was in commercial's ownership(although alot of that may still be in the farmer's bins) what need would there be to increase prices to "open bin doors"?

There is something to be said about ownership.

Attended a GrainCo meeting last winter, seems all "their" marketing schemes and scams offered to Producers were designed to guarantee them a supply coming up their driveway but transfer, or leave, the pricing risk with the Producer.
I'm to cynical for those meetings!