New Crop Pricing Opportunites for Canola and Feed Barley

[charliep]

Just a note to highlight the current rally in canola prices. May futures are over $280/t as I write. Nov is over $285/t. Basis levels have also narrowed in. Around Calgary, Agricore has been as low as $2.50/bu under with most other companies around more traditional spring offerings of $5 to $7 under. For reference in my community, $6 under is a good basis, $10 to $12 under is normal and $20 under is bad - we have seen all of them over the past year.

I suspect that farm managers will look at new crop canola pricing opportunities in the $6.25 to $6.50/bu range on this go. Interesting that on the barley side, new crop feed barley (delivered feedlot) is hanging around $2.75/bu with central alta. prices in the $2.40 to $2.50/bu range (48 lb plus picked up yard). I think there could be another dime to 15 cents in the feed barley this spring but that has yet to be seen.

I won't go into the outlook but the above levels are places where I will start doing some forward contracting - particularly for farm families with high cash flow needs off the combine.

Can farms in western Canada grow $6 to $6.50/bu canola profitably? What about $2.50/bu feed barley?

[charliep]

I always find the agricultural market fascinating and recent canola markets are no exception. Todays futures contract closes seemed to feature the $283/t special deal right right from the May contract to new crop Nov. (i.e. no carry in the market). To get some discussion going, any thoughts about why the canola market is reacting the way it is?

[chaffmeister]

Check out the weekly stats from the Canadian Grain Commission. Any time the cash basis and the inter-month spreads tighten up like they have, it means that the stocks in the pipeline are getting smaller (I haven't checked so I can't advise). Also, if you keep track of the vessel clearances for canola in Vancouver you would notice that China has had a bigger appetite for canola than many of us thought they would (Mexico too). I'm told that they will be in for more. So, instead of looking at a very burdensome 1.5 million tonne carry over (which pressures prices lower), we are probably looking at about 1 million - still burdensome but not nearly so.

It's not my place to say where prices are going but figure when exports of say 4.7 million for the year are satisfied, watch for basis and spreads to widen back out.

In my view, this is not the canola market trying to "buy" new crop acres because it is the old crop months that are moving highest.

Spreads and basis are a great market signal - right now they are saying, if you've got canola, sell it. I would add, pick your times but don't get too greedy. As I said before, once the pipeline is satisfied, watch things fall apart.

[chas]

Chaffmeister: I just sold my canola. The theory in my neighborhood is: The neighbors all watch me, when I sell they wait a week or two as the price will be higher. It works every time for them. Its likely as good as anyway to predict the market.
I think canola is headed for $7.50 in Dec. spread the word and it will hit $7.50 if everyone holds canola. I'll be selling at $7.25 . Chas

[charliep]

Sounds you have the same luck I do in trading futures. This is one of the reasons I work with farm managers as much on profit targets/cashflow needs as on forecasting the market.

The other issue is scale up selling with targeted sales volumes/prices. As an example, I look at 9,000 bu of canola as 5 "B" trains (I'll let others convert to tandems if this is how you haul). You might forward contract 2 "B" trains (80 t) in the spring ahead of seeding based profit targets (hard to do this year) and to ensure you have fall cash flow needs covered (not forced to sell in competition with neighbors in a high cashflow requirement/short bin space period). Maybe price another 1 or 2 in the summer/fall if there is some type of weather based rally. Another 1 or 2 during the winter. Finally, there is nothing wrong with holding a bin of old crop canola into the summer of the following (if your cash flow will allow). The objective on these sales is not to hit the home run in terms of the best price but rather keep your average price above the norm, be consistently profitable (tough this year) and be in a position where you're not forced to sell at a low price just to pay a bill.

A lot of theory here. How do others set up your market plan? What information do you use to make decisions? Do some of you use charts/techical analysis in you pricing decisions?

[TOM4CWB]

Charlie and Chas,

I think you folks somewhat are missing the point of modern marketing tools.

Insurance on Canola is about $10.00/t for about 8 months coverage of up side potential.

Why not sell the product whenever anyone gives you a good basis?

This allows the customer to have his needs satisfied!

This also allows the pipeline to empty out and the possibility for higher prices to become reality!

Holding options is much cheaper than holding grain, especially if a person is careful in buying them.

Further, the rising price winfall only happens randomly, about 1 in 7 to 9 years. Keeping Canola around till summer, and for a bin full, is it really worth the risk?

I know of thousands of bushels that never made it to any market, because farmers were greedy and to busy to look after this perishable product, don't you?

[charliep]

I agree Tom but my experience tells that options and futures trading aren't for everyone. There are also other tools offered by grain companies such as minimum price contracts. Cost of both options and minimum price contracts are something farm managers need to consider in a year of low prices - I hate to take a poor price and make it worst. The big thing is to have a marketing plan including alternatives and the discipline to act on it when targets are reached.

[chas]

Charliep &Tom4cwb: Discipline is the
key word. Discipline in your farm management decisions using priorities and realities based on your special situations in your business. Most of the time your situation is totally unique to your farm only. Production techiqiues can be similiar but financial situations can very greatly. Future markets gives us some managing ability but most management dicisions are made off of CWB intial and pro predictions the same as american farmers make theirs off of loan guarantees. We need stablity to made dicisions. Chas

[TOM4CWB]

Guys,

Use your imaginations a little!

Buy some calls, and when the market rises a little, throw a short position against those calls, bingo a synthetic put, or downside protection.

Buy some lower out of the money, and when the market crashes in July, throw a long position against this and presto, a synthetic call!

When the market has moved back a reasonable amount, take the position off and cash in.

If the futures position doesn't make any money, then the option expires, and the futures contract is covered, as long as the futures position was put on when the futures were in the protection range of the option, or "in the money".

The only risk is margin money, as the options cannot be banked against the futures position until the postion is actually closed out. Upon expiry the futures cancel the option and the futures don't even have to be bought back!

Does this make sense?

[chas]

Tom4cwb; Most farmers don't know what you are talking about and don't want to know. Its to complex Tom for the average farmer to even think about and be tangled if there going to hire some one who's wrong 3/4's of the time to sort it out. Lets teach people how to place a pricing order first it's simple and can be as benefical. Options are great but people have difficulty understanding them for some reason. Chas

[charliep]

A really good discussion/good points. Any other thoughts on setting up a market plan for the coming year? Maybe I will re-raise the question whether $6.50 canola and $2.50/bu feed barley are places where farm managers should be forward selling new crop?

[TOM4CWB]

Sorry guys,

I guess that this is why good consultants like KenAgra have a hard time making it!

But, isn't studying marketing tools just like reading and understanding the instruction manual for a new air seeder or combine?

I guess people don't want to study or understand, not because the cannot, but because they choose not to because they don't have to!

I realize that understanding this complicated futures stuff is somewhat dry, but if we need to assure a profit, it may be the only option avaliable.

I heard a wise man 3 years ago say, "you as a farmer are not going to make a profit by selling your cash grain, to make a profit you must be willing to harvest the speculators when they offer the chance to make a profit."

I realize this is just as hard work as cleaning out a bin, or mowing the yard.

The fact is that it is the most important part of keeping our farm healthy and creating a better future for the next generation who will farm!

Well maybe I am just plain weird, and find market watching nesassary, is that the problem?

I guess satisfaction and reward come in many forms, I find marketing time the most rewarding time spent each day, and in the long run the most important to my farm business.

But what can I say, we make the bed we lay in?

[charliep]

We are both on the same wave lenghth Tom. Futures and options are both good tools that can be used to help farm managers pocket pricing opportunities/manager their price risk. Your question is how does the industry help farm managers understand these alternatives and make informed decisions about their use.

The first step is to help farm families understand how these products work. Brenda, Lee and I have been actively involved in this type of training. Any ideas you have for improving farm managers skills in these areas and you have our undivided attention. Two things to highlight - it doesn't have to be government that does this. The second thing is these alternatives shouldn't be sold to farm managers - the idea is to inform farm managers about how they work and they can them make up their own mind as to whether it has a business fit in their operation.

The other thing that I keep in mind is that futures and options are simply a tool. What is really important is that farm managers decide what they want to accomplish in their business/marketing plan, review the pricing/risk management tools available to them and pick the best one for their situation.

I look for your thoughts on helping farmers understand the futures and options.

To add a little more spice, Nov. 300/310/320 are trading for $11 to $12/t, $8 to $9/t and $6 to $7/t respectively. Is this good time to buy some calls? The assumption is you are buying calls now with the idea of selling the next canola rally (hopefully we can get up to $295/t plus area in the Nov. contract some time in the next couple of months). I highlight the fact that canola futures went back to no carry on Fri - all futures contracts up to Nov. trading at close to $285/t.

[TOM4CWB]

Charlie,

I am very concerned that the Japaneese problems will flow through the world economy, that big bean acres will flood the edible oil market, and that these issues will make a big rally unlikely!

I buy my calls now as insurance to allow higher pricing levels, to go to 85% priced on deferred delivery contracts, but stay below 50% actually priced, in case I have a production failure. This is insurance coverage with real benefit, I can price to higher levels and normally participate in a big market rally if it should occur.

I must be willing to have these options expire worthless, 4 out of 5 years!

We have to spend money to make money, but a good plan is 90% of the way to making a profit!

[charliep]

Your strategy/plan is sound Tom. How are others approaching this years canola market? How far are western Canadian canola acres going to drop?