New Crop Pricing Opportunites for Canola and Feed Barley

[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?