New Crop Pricing Opportunites for Canola and Feed Barley

[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?

[chas]

Tom4cwb and Charliep: I took a $12 canola basis for Dec. Delivery, off of January future price. The contract has a $4.50 trucking assistance and has to be priced by Nov. 30. I contracted 50% of production. Should I be doing something else to protect a profit. Need Help. Chas.

[TOM4CWB]

Chas,

My personal opinion, for what it is worth, is that about 50% of your 10 year average production should be priced by seeding, if average moisture conditions prevail in your district.

If pricing is preffered to a higher level than 50%, then buying some puts at this point may be advisable, to take you up to say 85% priced.

This has been our general practice, and you may or may not be comfortable with this suggestion.

If you do take any of my advice, think it over very carefully, as you must be responsible for this decision yourself!

For what it is worth from a dumb farmer who has never marketed any wheat or barley myself in my life, a certain CWB commissioner told me!

[charliep]

Chas.

I apologize for maybe getting to basic but I like to get to fundamentals on a question like this.

The next step is to watch the January with the idea of locking in a price. Just to review, basis is the relationship/discount that relates a futures price (1 Canada canola loaded into a rail car out of an designated futures delivery elevator close to Saskatoon in the month of January) to your local cash price (delivered elevator Camrose). It is your responsibility to watch the futures market over the next 8 months with the idea of pricing into a rally at which time you have locked in an actual delivery price for Dec. or Jan. (as a note you can do a part of your contract versus all the contracted volume).

As an example, suppose Jan. futures rally to $298 on April 15. You are concerned that prices have potential to go lower so you want to use this opportunity to pre-price 50 % of the amount you contracted (25 % of your expected production based on average yields). The price you would lock in would be $286/t - $6.50/bu if you like -for this portion of your crop (Jan. futures of $298/t minus $12/t).

So how do you make the decision about where to price on the futures side? The two issues I would look at are breakeven analysis and market outlook.

On the breakeven side, what price do you need to cover your costs based on the best quess of yields (this time of year you have to go with averages adjusted for soil moisture conditions). Lets assume you need $200/acre to cover your costs (all of them including seed, fert., chemical, overhead, fuel, repairs, custom work, insurance, etc., etc.) plus depreciation plus family living plus interest paid). Realizing this crop isn't in the ground yet let alone harvested, an average yield of 32 bu/acre and an average of $6.50/bu gives a revenue of $208/acre or $8/acre of margin above costs - not adequate to cover return on investment but at least positive. Based on these assumptions, $6.50/bu should start to get your attention for pricing a portion of the contracted amount(this will vary between farms).

On the price side of the world, you have to look at canola outlook (both negative and positive. Negative is lots of world oil, a S. American soybean that is going to be a monster and another record US soybean acreage as farmers south of us. The positive will be a reduction in world canola/****seed production with a major portion coming out of western Canada. Could be wrong but I suspect that Nov./Jan. canola futures are likely to push into the $295 to $300/t range over the next couple of months. As a prudent risk manager, I will likely encourage locking a portion of the canola crop in this area (realizing we need to review the market when/if we get there).

I apologize for being long winded. How do others approach this pricing issue? How effective are basis contracts in your marketing plan?