Canola 2007 Risk Management... The AUSIE Experience 2006

[TOM4CWB]

Charlie,

Are you aware of what is going on down under?

Ausie Canola Prices Geelong Basis
Date(06) Price(AU) Basis (Over Nov 06 Fut.)
20-Mar.. $363.00.. $33.97
28-Aug. $422.00... $70.82
2-Oct… $451.00.. $91.17
9-Oct… $480.00. $119.70
16-Oct. $517.00. $148.65
23-Oct. $525.00. $150.67
Ausie growers and trade have a big problem with canola because of the drought.

Both the trade and Ausie growers are on
the buying side, growers are trying to
get clear of contracts they hedged on WCE.

This may explain some of the unrelenting upward WCE Nov-Jan futures… which flows through the rest of the Canola futures complex.

What IS THE lesson?

Use of fixed price contracts can be very costly… in a drought.
Ausie growers believed a $40/t basis was historically strong.

They are now facing a buyback cost of $150/t.

Isn't the best strategy for 07 canola.. to do any forward sales with
futures, and leave basis marketing until closer to harvest?

If the basis levels after crop establishment are not attractive, then we could store our Canola.

The new IP contracts can really put us between a rock and a hard place.

We need a basis Drought clause… at the least on IP contracts. If an IP contractor of specialty Canola does an acreage production contract … then the basis tonnage should be part of the production contract... for the production grown; not a set tonnage.

Let’s take this little Ausie experience and fast forward.

A drought in Western Canada in 2007.

With all the demand pent up for Canola… where would our basis go?

Could we see a $50/t over the Nov 07 futures… if the 2007 drought in western Canada materializes in August 2007? Is this possible; or are the Ausies just caught because they can't deliver against the futures... and the basis risk is magnified because of the distance?

Incognito... what are your thoughts?

Risk… how do we manage it?

Isn’t a lesson learn’t from the pain Ausies are experiencing… an important learning opportunity?

[silverback]

$525 AUS equals $10.23/bushel today.

We are at $7.25/bushel.

Please tell me why. Thanks.

[agstar77]

Yes , the open market, freedom to succeed and freedom to fail. Stress that every farmer needs on top of the stress of weather and everyday living. The Australian farmers that have to buy back contracts must be blessed with stress.

[craig]

Agstar
Farming by it's very nature is the opportunity to succeed or to fail. You somehow seem to imply that you can wave the magic single desk wand and everything will be all right. Marketing whether you are livestock producer or a grain farmer is part of farming. This skill is learned by using it and learning from your mistakes. Sadly in today's environment it is becoming increasingly more difficult to succeed selling at an average price.Whether you hire someone to do your marketing( single desk) or not, marketing is not an optional course in today's farming.

[charliep]

Given the futures delivery point is in Canada (actually around Saskatoon), there is not the same level of basis risk here as in Australia. The Aussie experience would be like using corn to hedge barley and having Canada move from an export (US corn minus cost to ship to ship south) to an import one (US corn price plus transportation cost). As you say tom4cwb, you need to be aware of the risk factors in contracts and take the protection to mitigate. Doesn't help on basis but way out of the money calls are a good investment (sometimes).

Agstar77 No basis/disaster risk in the CWB single desk system? Perhaps there is but it is hidden in the pooling system in general? Example - Where is the impact of transhipping 1CWRS 13.5 protein wheat east coast to west coast to cover a Japanese sales?

You might also want to have a chat with your neighbors who have signed fixed price contracts and had to deliver lower grades/buy their contracts out. Their experiences have not necessarily been pleasant (single desk didn't work here). Similarly, you might also chat with neighbors who locked in the futures side this spring/summer and are waiting for better basis levels. Similar comment for anyone who is wanting to sign an fpc over the next week. The PRO this pm will be interesting and its impact on fpc basis.

[cottonpicken]

I have a hard time feeling sorry for someone who sells something they dont have or grown yet way out into the future.I said it before and i'll say it again-does selling way out into the future not help cap market prices?If i promise you widgets at 1$ 8 months from know-how would that help widgets become worth more than 1$?Or would it infact help keep prices down.Those aussies that got burnt were playing with fire.It reminds me of that micheal moore documentry were there interviewing that soldier about riding around in a tank and listening to music.The soldier replys my favorite song is-"we dont need no water let the motherf#@*er burn,burn motherf#@*er BURN!!"

The sweetest smell to a bulls nose is a burnt short covering rally!BOO YAA

[TOM4CWB]

Charlie,

I talked this basis issue over today with an IP contracter... Already incorporated is an "Act of God" clause for 2007.

Growers need to make sure they understand the basis system and risk manage it. On paper is much better than a promise that everything will work out!

[malleefarmer]

Tom most growers you will find washed out canola probably back aug/sept where the penalty wasnt as great
i never foward sell canola on our ranch as we have ever present frost problem and cant guarentee production ever

[Incognito]

Mallee:
Can you email me please.

agrivilleincognito@hotmail.com

[Lifer]

CP How many people go to work without first working out what they get paid or how to calculate what they get paid?

It has probably been written enough on here but you don't seem to get the point. This isn't about selling for the highest possible price for a lot of people. If that is your goal good for you.

For me and others it seem it is about managing the risks out there to insure we have a profit.

As you clearly point out there are risks to selling in the future but in most incidents, to me it is less then planting a crop completely on spec.

[cottonpicken]

Lifer i dont think you have a clue about risk management.Those aussies who dont have a crop or income now have to come up with money to cover their canola positions.Do canada savings bonds sound good to you-save, secure 5.5% interest no risk right? But what if inflation is running over 7%(which it is).Things are not what they seem and what you think is safe is not and what you think is dangerous is not.Your right on one thing though it has been "pointed out" how to risk manage on this board,but personally i'm more of a put all your eggs in one basket,and watch that basket, type of guy.

[craig]

CP I don't understand yor logic. I have a standard marketing rule that anything I deliver in the harvest period for cash flow purposes is priced before harvest.Obviously that doesn't apply if the numbers don't work but the majority of the time I do much better than just dumping crop.

[Lifer]

CP I don't know all your risks. I know a lot of mine and am open to learning more because I don't know everything.

The aussies seem to have made a mistake. Once a plan is made one does still need to be open to making adjustments. How many people in 2002 with presold or hedged positions in Canola had to buy them out? I used a futures position with a prearranged basis and was able to exit with little damage to my bank account and my relationship with my customer.It was a good learning. A strategy built on 7 out of 10 years is better than on a one in 100 year drought in my opinion.

I think that not having a market or customer lined up is a big risk. I also think that working together with this customer whether it is a big scary company or my neighbor is a better approach for me and my family.

I will minimize the amount of crop I grow on spec. I still need to manage my agronomic risks though.

I also think that investing in myself or family enterprises will have better payback.

The closer I can get to an end customer the better opportunity there is.

[TOM4CWB]

Lifer;

You are right on.

Our farm's experience is much like what you have expressed.

CP's risk management strategy for a large grain growers is a VERY HIGH risk strategy... IMHO.

[Lifer]

How much different is the Australia experience of using WCE canola futures as a hedge than this years CWB fixed price contracts?