Argentina’s 2016/17 soybean harvest not going to be that big!

[bucket]

Farmaholic

Exactly. ...if there is enough money to be made on paper .....to make my farm that much more profitable. ...why would I farm?


There is only one market that trades in Canada. ...canola....and most honest brokers will tell you it's not very liquid.....

So everything else is based on US exchanges.....making it difficult in Canada because there is no transparency to the industry here....


The US reports sales as they are made.....no such thing here.

The commissions in North Dakota make good opinion pieces for their producers....we have guys on commissions here doing what exactly?

[farming101]

Much rather trade canola than MGE wheat.
Actually delivering against a contract is another thing all together.
Low risk paper trading is backed up by the real thing. That is why a guy needs to farm.

[errolanderson]

bucket . . . some strategies some clients have started utilizing guarding new crop canola.

1. Short Nov futures outright . . . as there are really no new crop canola put options trading very well just yet, some growers have shorted the futures outright until they decide to lock the basis and/or feel more comfortable with production prospects. As some point, these short hedges will be offset, once DDC contracts are signed.

2. Mar/May canola put options. ICE canola futures are already dropped $40 to $50/MT from early December. These options are being valuable protection, but timing of course is important.

3. Soymeal put options . . . an idea . . . take as opinion only, but we feel there is overall potential more downside in the U.S. soy market more than Cdn. Our reasoning . . . Trump and the trade standoff with China ahead. China basically stopped buying U.S. beans on Dec 23rd. Also, South American production will be another record. China is waiting to divert purchases.

4. Nov soybean put option bear spreads . . . buy a put, sell a put and create a $1 plus downward window for a more affordable price. Negative to this, new crop soybeans may drop more than $1/bu and then your coverage is maxed out. Some analysts stateside very bearish beans suggesting a $6 in front of soy prices next fall. Too early to predict that (IMO).

5. DDC contracts . . . basis is the question here. If you can live with the basis consider starting your pricing, but production risk risk and quality a risk. Start gradually. I favour using options as there is no delivery, production obligation and wait on DDC's later in crop year (IMO).

bucket . . . cost is variable depending on quality of price protection. solid Mar/May canola puts will trade around $15 to $20/MT . . . meal puts are cheeper than soybean . . . they range $10 to $15/ton for very decent quality protection. Again it may be better to leap-frog your position . . . example, buy Mar/Mar anD than cash out and purchase Jul onward for protection. Why? Time value is far more expensive than a broker's commission. Leap frog strategy is actually less expensive. Try not to spend an arm and a leg on time . . . that makes options unaffordable and less responsive. Soybean options are expensive . . . for soybean and cattle, we typically use put option near spreads and call option bull spreads to reduce overall premium cost . . . an idea.

Errol

Could you run a scenario of price risk management and it's costs to a farmer?

Give us an example of options ...puts and calls .....and their costs and a net price per bushel for the producer after he pays the fees...

Show us the upside and the downside and the benefits of it.


Let's say I have 10000 bushels I want "protected" of new crop durum.

Or canola wheat lentils flax.....

What market in Canada is liquid enough to trade price risk management options on?

Just asking....

[bucket]

Errol

You didn't explain a net cost to the producer.

Using options that cost 15 to 20 a tonne is 50 cents a bushel.....


Now figure that expense against what he might get paid....what''s the net after the smoke clears.

I am a simple bastard .....I have enough complications getting the crop in and off to add whether I am paying margins on a crop that mother nature decides to make me combine in December.

So put some net figures and actual costs to all the scenarios because you never call a broker for free.

[errolanderson]

bucket . . . unless I'm interpreting your question wrong, there is no way of knowing the return on your price protection as the market is always a moving target. Put options may expire worthless, which is the best case situation as that suggests cash price rose. You would lose the say 50 cents/bu but sell into the higher cash market. If Nov canola drops to $440/MT, your put options would kick in value. Lets say you own a $480 put option . . . you would be $40/MT in the money - your premium = about $25/MT return. This is horseback arithmatic.

Errol It is simply price protection in an uncertain commodity world.

An advantage of options is the grower can manage your own price protection program, not the government. You have total flexibility to manage your own business, without program rules and a major middleman.

You didn't explain a net cost to the producer.

Using options that cost 15 to 20 a tonne is 50 cents a bushel.....


Now figure that expense against what he might get paid....what''s the net after the smoke clears.

I am a simple bastard .....I have enough complications getting the crop in and off to add whether I am paying margins on a crop that mother nature decides to make me combine in December.

So put some net figures and actual costs to all the scenarios because you never call a broker for free.

[farming101]

Everything else equal if Argentina comes in 7 MMT under the Jan17 WASDE what does that do for world ending stocks?

Add total oilseeds ending stocks for 2014/15 and 2016/17 and there is actually a drop of nearly 8 MMT
Beans will be in demand.
Should be total oilseeds, meal and oil stocks

[errolanderson]

bucket . . . unless I'm interpreting your question wrong, there is no way of knowing the return on your price protection as the market is always a moving target. Put options may expire worthless, which is the best case situation as that suggests cash price rose. You would lose the say 50 cents/bu but sell into the higher cash market. If Nov canola drops to $440/MT, your put options would kick in value. Lets say you own a $480 put option . . . you would be $40/MT in the money - your premium = about $25/MT return. This is horseback arithmatic.

bucket . . . maybe this is a better example.

Say you buy a Nov 480 put option for $20/MT in March

$480 strike price - $20/MT premium = $460/MT floor - your expected fall delivered basis = expected net return. That is your expected fall price protection using puts only.

[SASKFARMER3]

Sitting in line waiting on delivering a Xmas contract! CN showed up with work crew I smell a train!
On canola yea I can lock in $11.50 dropped in Cargill pit fall for soy! Canola 10. Yea the boys know it will go to the USA unless it's the same!

[blackpowder]

I would happily pay an affordable price for fire insurance and never collect.
Option spreads when doable only on unpriced same thing.

[farmaholic]

Hmmmm. look at it this way. That 50 cent premium on a 40 bushel crop is $20/ac. That fifty cent option premium on a $10.50bu is 4.75% of it's value and everything else also has to be paid for out of that $10.50 bu as well.

So do I want to spend $20/ac and have another "insurance" expire worthless? Whose to say the option doesn't expire worthless "at the money"(if that is the proper phrase) and little to no gain has been made above the floor price I'm trying to protect. I guess if you're ok with that there's nothing wrong with it.

Your best insurance is self insurance. Operating on the edge? Can you afford a hit? Everyone's circumstances are different that is why it isn't fair to say these strategies should never be considered.