Producer Currency Hedge?

[lakenheath]

Would it make sense to purchase some currency options to hedge against a potentially increasing CDN dollar.

How much more of a squeeze can we take on currency?

Would this be too risky a venture to do at the producer level as far as cost and risk exposure?

Are currency options expensive?

If the CDN actually decreases in value and commodities continue to devalue, the option actually hurts you worse?

Does anyone currently do this?

Tom?

[Incognito]

I know farmers who use Forward Contracts - It is a contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.

Forward contracts are used as a hedge and you have to make or take payment in the future.

I'm not at my desk, but the spread for a September delivery versus spot is probably close to minus 200 points (and i'm going to use round numbers to make it easy) meaning you could lock in $100,000 USD at 1.120 - spot being 1.140.

Some banks will use a ratio and put a hold on your your line of credit for the risk involved. As long as you are on the right side of the trade your line of credit may not be charged at all.

If the dollar goes to 1.14 on the date of maturation of your contract, you are responsible for the difference; in this case, $2,000.00.

If the dollar goes to 1.10, you are ahead by the same amount.

It is an inexpensive way to manage forex risk.

Each bank is different so check with your account manager. IF they do not know, ask to speak to their FOREX desk.

Chaffmeister is going to have better examples than this one; but I know farmers who have and are using it.

[Incognito]

PS to the above.

Some banks will take offsetting options on the above scenario and it wont cost you much; however, if it goes in the example above, to 1.05, they may limit your gain to 1.10.

It limits your downside risk and takes you out of any upside potential for next to nothing. For a farmer, and the CWB for that matter, it is the hedge that you are looking for, not speculation. Risk management. Nothing more, nothing less.

[Horse]

Didnt you know we cant think or do without the US
Does anyone know the benifit of bio diesel I mean how much fuel does it take to produce a litre of fuel.

[cowman]

Well I think Husky is building an ethanol plant? And someone else is also?
And of course Poundmaker feedlots has been producing ethanol for a long time?
I think the plants in the US have beniffitted from government money and legislation?
In reality ethanol and bio deisel couldn't compete with petroleum in the past...not so sure today? With crude oil at $60 a barrel it might be feasible...but what happens if crude falls to $40 a barrel?

[cowman]

I think if you look deeper into this you will find the USA has a program that really backs their entrepreneurs on these energy ventures? I do know they have funded a lot of bio gas plants with a lot of support?
In Canada it almost seems government, both federal and provincial, does everything in its power to discourage alternate energy supplies! I don't know why...but suspect a list of contributors to the political parties might be interesting?

[greybeard]

The North Dakota plant is the ADM plant at Velva. It’s on Soo Line, owned by CPR. ADM has a collection facility at Watson. They run unit trains to Velva.
Again, we are primary producers with the value added somewhere else

[SASKFARMER3]

I agree that it is a good idea. With all the tree huggers out their biodiesel is cleaner burning.
But typical canada we look at what every one else is doing and just sit back and wait.
Farmers in the USA with a healthy bottom line because of their subsidies have extra cash to put into these ventures.
But dear old canada with our BS system farmers have no money left for projects.
Their is a new one being started in our area they need 200 farmers at 50,000.00 a piece to build it who has a spare 50,000 kiking around.
In this country farmers are second class citicines, the urban dwelers feel we have no place in the new canada.
Yes our canola will go to velva ND to help fill their system. We will pay freight and feed the US system, I just dont get it.

[SASKFARMER3]

I agree that it is a good idea. With all the tree huggers out their bio-diesel is cleaner burning.
But typical Canada we look at what every one else is doing and just sit back and wait.
Farmers in the USA with a healthy bottom line because of their subsidies have extra cash to put into these ventures.
But dear old Canada with our BS system farmers have no money left for projects.
Their is a new one being started in our area they need 200 farmers at 50,000.00 a piece to build it who has a spare 50,000 kicking around.
In this country farmers are second class citizens, the urban dwellers feel we have no place in the new Canada.
Yes our canola will go to velva ND to help fill their system. We will pay freight and feed the US system, I just don't get it.

[joedales]

Things are starting to happen in Canada - the USA seems to have a greater political will to become more self sufficient in energy...Also there have been more investors in the USA and they drove the growth in the number of plants faster tnan in Canada. I think Canada will benefit in the short and long term because of higher grain prices.