Canola best priced in spring: analyst

Dave Reimann has been studying canola futures charts for the 40 years he has been in the grain business and the pattern is almost invariably the same.

The November futures chart peaks in the April-June time frame, drops off throughout the summer months and then starts climbing in the post-harvest period.

That tells him farmers should be pricing their canola in the spring but many growers are hesitant to do that because they are worried they may have a crop wreck and won’t be able to deliver on the contract.

“You would be amazed at how many farmers I still meet to this day who just look me square in the eye and tell me, ‘I don’t sell anything until I harvest it,’ ” the Cargill market analyst told producers attending his CropSphere presentation.

The problem with that strategy is that the worst futures prices and the worst basis almost always happen in that September-October period.

His recommendation is to be as much as 50 percent sold in the spring. Most growers are about 25 to 30 percent sold these days, which is a big improvement from 40 years ago when they were five to 10 percent sold.

Reimann said growers need to realize there are tools that Cargill and other grain companies and brokers sell that can allow them to exit the market at little or no cost if it looks like they won’t have adequate production.

He considers the minimum price strategies to be no-brainers because they allow farmers to limit the downside and participate in any upside in the market.

“I don’t know how that doesn’t work out to a successful farm over a number of years,” he said.

Of course there is the occasional year where the November futures contract keeps rising throughout the summer and fall period, which means growers might miss hitting the home run every 10 or 20 years.

Instead, they will consistently be getting base hits year-after-year by employing minimum pricing strategies and will end up buying land from their neighbour trying to swing for the fences.

The beauty of the strategies is it doesn’t matter what U.S. President Donald Trump is tweeting or whether China or India are annoyed with Canada or where African swine fever has been discovered because your price is locked in.

“Position yourself so you don’t have to predict the future,” he said.

“I don’t have to know if it’s going to rain in Iowa in July and I don’t have to know what’s going to happen in Mato Grosso, (Brazil), in February.”

Reimann strongly urged farmers to consider using an averaging contract as the tool for pre-marketing their canola.

“It’s one of my favourite things in the world right now,” he said.

The contract allows growers to get the average price on a futures contract over a defined period. Reimann said that period should be April through June.

“You’re pricing a little bit every day across the pricing period,” he said.

For instance, if growers take out a 100-tonne contract over a 100-day period they would be pricing one tonne per day and averaging the price over those 100 sessions. It smooths out the volatility in what can be a tumultuous spring period.

Another strategy is to use put and call options, which should be considered as a form of insurance.

“I like to call this the “have the cake and eat it too” strategy,” said Reimann.

Growers can attach a put to an existing contract and if they don’t have the production they need they can liquidate the put, eliminating the delivery obligation.

November canola futures were trading at about $500 per tonne at the time of his presentation. Taking out a put would cost growers about $15 per tonne plus another $3 per tonne fee charged by Cargill.

That creates a floor price of $485 per tonne for the grower. The market can plummet and the producer would still receive that minimum futures price.

If the market rises above $500 the value of the put goes down until it is eventually worth nothing but the producer needs to realize that all of his unpriced canola has just increased in value.

“You want to lose money on this. You do. It sounds weird and it’s very hard to understand at first,” said Reimann.

The other option is to use a call. He used the example of a 23-year-old farmer who is “mortgaged up the wazoo” and needs cash by Oct. 31 to pay his debts.

That farmer can sell all of his canola at $500 per tonne and replace it with a call that costs about $15 per tonne plus the Cargill fee, a total cost representing about four percent of the value of his canola.

The grower takes 96 percent of the money and gives it to the bank while staying in the market to capture any further gains if the futures price rises above $500 per tonne.

The maximum the young farmer stands to lose is the four percent.

“He can be bullish and wrong and find out very inexpensively and in the meantime manage the cash, keep the bank off his shoulders and keep the grain movement going,” said Reimann.

The biggest benefit with all the strategies has nothing to do with money and everything to do with being able to sleep at night, he said.

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