Five hundred is a nice number.
That’s true especially when it’s in dollars per tonne for new crop canola and gives farmers a chance to take some 2017-18 price protection.
“It gives us that nice round number to look at,” said David Derwin, an adviser with P.I. Financial in Winnipeg.
Both Derwin and Jon Driedger of FarmLink Marketing have recommended farmers consider making new crop sales at today’s forward prices but to be cautious about it.
Neither is bearish, but both say most farmers should be able to protect profitability of some of next year’s crop with today’s prices.
However, each has focused on a different method of obtaining protection.
Driedger has suggested farmers “be opportunistic” with new crop cash bids from elevators, grabbing great temporary offers but not being in a rush to accept just any new crop offer.
“Values are pretty good, particularly if you can identify someone who has a special,” said Driedger.
“We don’t want to just jump at whoever has a bid out there.”
Driedger isn’t worried about a big drop to the downside any time soon and thinks new crop values could rise further, so farmers should be looking at new crop pricing mainly as a way of dealing with financial risks other than price.
Making fall 2017 cash sales now locks in a delivery period that many farmers need to cover bills and other expenses. This means that locking in a part of the expected 2017 canola crop at profitable levels can make sense now.
It is especially true if farmers live in an area with relatively weak competition, such as central Alberta or Saskatchewan. A good price there providing a delivery opportunity can be a worthwhile way to begin the new crop marketing plan.
Derwin also isn’t bearish, so his focus is on leaving upside potential and simply cutting off the risk of the market falling.
He has begun asking farmers to look at buying put options to cut off the downside without locking in prices. A $500 per tonne new crop put costs at about $25, so a farmer can lock in a $475 net price, minus local basis, and give canola the next few months freedom to go higher.
Options also don’t lock the farmer into delivery responsibilities, so farmers aren’t at risk for delivery commitments that can’t be easily met in a year like 2015-16.
“At this point we’re so far away from next year,” Derwin said.
“With production contracts, you’ve got delivery commitments and the production risk associated with it, and you don’t have any more upside in case canola prices go to $600.”
This is a happy time for hedging canola with options, Derwin said, because the ICE Canada options only recently became liquid enough to use without having to pay a big price. As well, futures prices have risen at the same time, so all of a sudden they offer a real choice.
“The options really do give you much more marketing flexibility,” said Derwin.