Canola Strategies

[Kasro]

We've had a little setback here in canola futures prices. Just wondering whether it may be an opportunity ro re-own some past sales of old and/or new crop canola? I don't think this price drop is going to be permanent. What month would be the best to purchase, if in fact this is an advisable strategy? Where would you place a stop? Any ideas Charlie Pearson or Brenda?

[charliep]

Before answering about canola replacement strategies, I should highlight I have made a recent contribution to my futures market education account (long and wrong).

I agree there is reason to be optimistic about canola prices over the coming winter (tight canola supplies w. Canada/world situation, improving world vegetable oil outlook, continued strong meal demand). This optismism has to be offset to some extent by a US soybean market that still has weather premium in it (weather could either be good or bad during the next couple of months), a CBOT soybean oil price that has rallied dramatically in spite of the need of US vegetable oil markets need to increase sales/decrease stocks and indications S. America will increase soybean acreage by 10 % in Oct. to Jan.

Do you use replacement strategies now? This really depends on your strategy/experience. My thoughts for most farm managers is to be patient/put the crop in the bin first. Unless the market gets a real weather/production surprise, canola should hold a trading range around $350/t. This should allow the US soybean oil situation to sort itself a bit as well (get some more export business on the books to move the current massive inventories there).

I look forward to others thoughts on the canola market/ways to trade.

[Kasro]

Charlie, I do from time to time replace sold inventories with futures. I realize that much of the price increase from 2000 crop is behind us, but there has been a $20.00 drop from the recent high. For 2000 sales that were made just recently, I could reown some cheaper than I sold it for. For older sales, I will have missed some $$$ by buying now. Might average out close though. I guess the question is, will we see the recent highs again, and when might that be? Should one look at buying Jan or March? Also how much weather premium IS there in beans? Seems to me there is not that much. And from early reports on canola harvest, is 4.8 MMT achievable? My own crop is likely only going to be 60-70 % of expectations of only 2 weeks ago due to late dryness, sclerolitina, and now armyworms in the later planted fields. I am located in what was supposed to be one of the few the only good areas of the prairies, and we are now much below 2000 in terms of yield.

[charliep]

Kasro

1) Have we seen the highs in the canola market? Given the tight canola supplies, my guess is that we will push through the recent highs with a reasonable probability that we will put a 4 in front of the nearby canola futures contract over the coming winter. I think this will occur in the winter. Timing is everything however with the other question whether we can hold support in the $345 to $350/t area basis old crop months (I find it interesting there is no carry in the futures today as I write). An aggressive trader would look at buying in this area but my philosophy is to be patient. Your question about where to place stops is relevant with a low equity trader/risk adverse person likely having to be willing to risk $8 to $12/t. I find stops a very personal decision with a discussion of strategy/objectives very important to this decision.

2) How much risk premium in soybeans? I still have to highlight the argument in the US is side of 2.8 bln bu the US soybean crop is going to be. There is still 5 to 6 MMT of old crop South American supplies to be sold (2 MMT same period last year) plus the increase in acres over the next 6 months. The demand side is what is keeping soybean prices perky with expectations that China will continue its monsterous import program. Soybean oil continues to slip lower and this has to be the biggest issue for canola right now (at least until the market focuses on our own situation more).

3) August 28 will be the first Canadian crop estimate on canola production. Accepting the fact the survey was done first week August, there is some likelihood it will be high but I am commenting on an forecast that hasn't been released. The question is how short the canola crop will be relative to the demand base Canada has built for it.

Again, I look for others comments on this market.

[Kasro]

Thanks Charlie. Your thoughts are definitely a help. I think you are saying it will likely be worth while to reown past sales of canola. Now the question is....when. I guess I need to assess the market daily and try and identify a trend change from down/sideways to up. Will likely miss out on the first $10 of the move, but hopefully can pick up at least $30.00. How about your ideas Lee and Brenda?

[charliep]

I thought I might pass along a couple of comments base on experience.

1) A life/work experience is that I am trying to work toward is trying to forecast less/understand the market more with the idea of positioning. My example in dealing with the market is comparing it to sorting cattle. You can have as much theory about cattle behavior as you want but it is your ability to understand/react to them at that point in time that will allow you to get the sorting job done.

2) The importance maintaining a fundmemntal view of the market/staying informed. I rely on supply demand tables etc, other tools of the trade to stay on course for market planning purposes. I review the strategy regularly but I don't change them unless circumstances really dictate. This means not giving myself an excuse for inaction when the decision gets tough or changing my market plan more often than I change my underwear (a likely scenario if you are reacting to the current weather market).

3) The importance of having stops on a speculative futures position. My policy is to decide right at the time of the trade how much I am willing to loose. When I have endured this amount of pain, I get out. Not a pleasant experience. If your strategy is still appropriate, then you can get back in but you need the time for review/soul searching. If I had held my canola, I would have had an additional $800 loss in addition to the pain I had endured already. Will I buy canola futures again? Likely but I want some signals to suggest higher prices.

I will leave for Lee and Brenda to comment.

[melvill]

I agree with Charlie's idea of deciding ahead of time how much pain you're willing to endure on a spec trade before you close out the position. I've learned how important that is in my own trades and from watching a number of my clients take positions and treat them like grain in the bin. In other words they try to "store" futures 'till they get back to even money - BIG, BIG MISTAKE. Better to re-evaluate and reposition rather than wait and hope.

[charliep]

One of the curses/realities of writing is you get to review what you said/learn from it when appropriate. I have to admit to somewhat (not totaly) surprised by how how far canola prices have dropped. The issues have been 1) larger soybean oil inventories than expected and a slow export program and 2) ample supplies of canola purchased early relative to the confirmed export program for the next couple of months. In both cases, prices have to come down to the point where more sales are booked. In the case of canola, more Mexican business and the beginnings of some Chinese business.

Time to buy futures or options? I hate to be a bottom picker so I would sit on the sidelines for the moment. I wouldn't panic on cash sales unless I am force to for cash flow reasons. A note is that it may take into 2002 calendar year to put some excitement back in canola prices.

I look for others thoughts.

[crusher]

My canola bins (once they get filled) will be locked for a while. I agree with Charlie's analysis of canola, but we may still see some more downside. I've got my target price and I'm going to wait it out.

Sold 1/2 my peas for shipment by second week of September. Prices $4.50 - 5.25, mostly at the higher end. I see that prices have backed off 25 cents, so I'll wait out that one too for higher prices.

We respect to barley, I'll probably sell some off the combine (if I can get a firm delivery time) at $2.90 Edmonton. I've got bin space for the balance of my crop, but as my good friend Tom (where ever he is), always says, can't lose money selling at a profit.

My plan for wheat isn't so clear. It's still growing but has just about made it. I'm hoping I don't get any frost along with everyone else in Northern Alberta and there is a shortage of feed wheat.

What is everyone else thinking?

[TOM4CWB]

Crusher,

You certainly are optomistic!!!

I on the other hand am not quite so bullish, and here is why:

The slow down in the world economy.

Barley prices are in the top 70% of the historical market after netting out freight changes, and long term I can't see how Canola can remain this high, along with soybeans.

I sold some feed wheat the other day, I sure hope this market can hold, can it?

On Canola shipping, big problems in Vancouver, Cars full of CWB grains with no sales. Shipping is rumored to be screwed up for the next 3 months!

Big back log in elevator system!!!

I am afraid the early bird will get the worm this fall!!!

What does this all mean?

[charliep]

Tom4cwb

I found your comments on grain movement interesting. The only issue on this front that I have heard of is summer movement of mid quality/lower protein durum out of the elevator system into the terminals. Given the size of this years crop in general, export movement shouldn't be a problem.

There are a lot of pluses and minuses on both sides of the grain/oilseed/pulse market outlook this year. I think it is a good year for balance/scale up selling on all commodities. Replacement strategies may work this year (I share some of your concerns on the overall economic front) but a person can afford to be patient until the market gives clearer signals. It also means you can focus on getting the harvest done/fall work completed without distractions of trying to call the market.

I am optimistic about the future of crop prices (would't likely go down much to go much/have potential to go higher) but would still have the discipline to make sales in here.

Comments.

[TOM4CWB]

Charlie,

Fall work is the preperation for the next crop!

We need to be making decisions now about next year!

How much Canola do we grow?

Are CWRS and DURUM the only wheats the CWB can come close to doing a reasonable job of marketing?

How much barley do we plant?

We must get clear signals, the only clear signal I am getting is that CWRS is the KING ahead of all other classes of wheat, and CANOLA is needed to generate cash flow.

Should we start pricing 2002 Canola?

[melvill]

I've made a strategic decision. I'm staying out of the pro-CWB-anti-CWB debate. It's sort of like picking up a hot cast iron frying pan with oven mitts that have holes in the palm.

I will touch on the pricing 2002 canola though. One peak at Friday's closing quotes on the WCE at <http://www.wce.mb.ca/market/_activepages/market.htm> with the $30/tonne inverse between Nov 91 canola and Nov 92 canola tells the story. There's along time between now and seeding next spring although I will grant you that the expected much larger S. American oilseed harvest coming in February could be seen as a threat. However, Nov 92 canola at $306 less a $10 basis for Central/North Central Alberta giving an possible $296/t or $6.71/bu. next spring doesn't get me excited. But Nov 92 canola at $335 would increase my pulse a little. Besides we've got lots of time for summer 02 weather rallies.

[charliep]

I agree with Lee's comments on new crop canola prices.

Still early to make any other comments on 2002 crop. With regards to canola, we can easily absorb a 20 to 30 % increase in canola acres next year - canola is a world crop with more than enough demand to absorb whatever we produce (at a competitive price with other oilseeds naturally). Your comments on CWRS wheat are likely correct on the CWB side. Domestically, CPS wheat will continue to have a fit domestically.

My strategy for the coming year would be to grow a blend of crops that fit my long term crop rotation and show up best in my budgets. I am optimistic (notice not bullish) about all crops market outlook in the coming year. The benefit is that you can plan on growing crops that have an agronomic fit (good yield potential based on your long term plan), business fit (profitable) and a market fit (fit with a customer profile).

I am looking forward to dealing more with questions like this during the winter. Comments.

[Kasro]

It seems like a long time ago now that we had our shortlived rally in canola. According to the prevailing price, it seems also like the fundamentals have changed considerably. What are peoples' thoughts on:

1. What would the price be if we did not have a drought.....Production 6.0 million tonnes or more? Shuddder...shudder.

2. Is China completley out of the market for canola (or Soybeans) for this year?

3. Stats Canada is going to give us new numbers On Friday Oct 5. Personally I think 2001 production will be closer to 4.0 than to 5.0. What if canola production number is very low. Does that give us any bounce, or are crush numbers so bad it won't matter?

4. How many soybeans can the world eat? With Brazil growing more because they have an economic incentive to do so, and the U.S. growing them because the government pays them to even if the market price was zero, will our next problem be looking for an alternative to growing any oiseeds here in Canada? It looks like that to me. And pray what alternative is left?