Farmers who eye canola rally should consider price protection

Farmers have been given a gift for this last little bit of pre-seeding.

They’ve also been handed a chance for fresh risk, if they’re that sort of guy.

It all comes from the canola market rallying about 50 cents a bushel since midwinter, especially in terms of profitability. It comes from a nice little follow-on rally that has been inspired by soybeans, which is benefitting from strong meal demand and crop conditions in Argentina.

That’s a profitability that can be locked in for 2018-19, which is attractive to risk-conscious farmers.

However, it adds new risk to the market too, if these higher prices push enough farmers to throw extra acres into canola, especially if that canola is unpriced.

Some farmers stick with their rotations no matter what, but some are willing to move crops in and out based on their profitability potential, and this recent rally will definitely entice a few to grow canola to the max this spring.

Some farmers employ the infamous canola-snow-canola rotation, and that phenomenon also isn’t weakened by the recent canola price strength.

If these higher prices last a few more weeks and a couple of hundred thousand extra acres of canola go in, it doesn’t help the supply and demand situation any.

That’s why all the advisers I’ve spoken with are encouraging farmers to take some price protection on new crop canola while prices are still solid.

“Certainly if you’re thinking of canola because you like the price, that’s all the more reason to look at some hedges and some protection,” David Derwin of P.I. Financial in Winnipeg told me.

“At harvest I’m sure the price won’t be at this level. It could go higher, but if you don’t protect it and it goes $50 (per tonne) lower at harvest, you’ll be kicking yourself.”

Neil Townsend of FarmLink Marketing said the upside might not be too great, not just because there’s already a risk premium in today’s prices that accounts for some of the worry about Argentina and dry Western Canadian conditions, but also because farmers seem to hit the market with sales whenever $12 per bushel prices appear. Grain companies and crushers don’t need to chase prices much higher.

“When they go to buy it at $12, they don’t seem to be having trouble,” said Townsend about current prices.

Bruce Burnett of Glacier MarketsFarm said today’s prices aren’t unreasonable, considering the various production risks out there, but normal weather this summer won’t be enough to support prices alone.

“As long as North American weather is good this growing season, prices will likely move lower (all other things being equal),” Burnett said.

Much of this recent rally has been due to the weakening Canadian dollar. Soybeans have soared because of meal demand, but meal is a much smaller part of canola demand than it is for soybeans.

Vegetable oil prices are flat, so canola has been able to enjoy a modest rally at a time when there’s not too much fundamental support for it.

That’s a gift for new crop sales and well worth considering. Some will use this to take some market risk off the table, while others might use it to raise the stakes.

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