How would you like to earn an extra 62 cents a bushel on your 2020-21 canola crop?
That is entirely possible given the current carry in the market, said Jon Driedger, analyst with LeftField Commodity Research.
Carry is when the market is willing to pay farmers a higher price to deliver their grain in the future rather than today.
Last week, the November futures contract was paying farmers $471.50 per tonne. The basis for fall delivery is about $35 under.
That works out to a “ho-hum” price of $436.50 per tonne, or $9.90 per bushel.
But what if farmers are willing to hold their grain longer? The March futures contract was $483.80 last week.
So the market was willing to pay farmers an extra $12.30 per tonne to store their grain until February, which is the delivery month for the March contract.
He believes it is well worth it for farmers to leave their canola in the bins an extra four months.
“It’s a gift,” said Driedger.
Grain bins are a “sunk cost” for most farms — they are already bought and paid for. So the only cost is four months of lost interest on their money, and that doesn’t amount to much these days because of phenomenally low interest rates.
Of course, there is the risk that the canola could spoil in the bins if not properly stored, and some farmers are going to need immediate cash flow come fall.
However, growers who can afford to be patient might want to take advantage of the current carry in the futures market, he said.
The carry exists because there are comfortable supplies of many of the principal crops, and it is pretty pronounced with the carry spilling over across crop years, which is unusual.
A second critical component of the strategy is to wait for basis levels to improve and then lock it in.
Instead of opting for a $35 under basis level in October, the chances are those levels will improve between fall and early in the new calendar year.
In most years a farmer can lock in a $20 under basis between now and February with reasonable confidence.
That is another $15 per tonne advantage over the original scenario. When combined with the $12.30 per tonne premium for holding onto their canola a little longer than usual, that’s a $27.30 or 62 cents per bu. bonus.
“It is low risk and yet the gains are substantial,” said Driedger.
The risk is that the basis won’t improve but most farmers have a pretty good idea what the pattern is in their area.
The beauty of the marketing plan is that farmers don’t have to wait and hope that the canola market appreciates by $27.30 per tonne between now and February.
A similar strategy can be employed with other futures traded crops such as wheat, soybeans and corn.
However, Driedger said the basis patterns tend to be more consistent and reliable in canola than the other crops because canola is traded in Canadian dollars and the pricing points and delivery locations are in Canada.
That is not the case with the other crops, which have U.S. contracts, exchanges and delivery points.
“It doesn’t mean it can’t work, it’s just a little noisier,” he said.
Driedger suspects few farmers are using the strategy because it requires a hedging account, and many farmers don’t have one.
Those who do own one likely don’t use a two-pronged strategy of taking advantage of the carry in the market and waiting for basis levels to improve.
Some farmers are also fearful of the risk of margin calls, but he doesn’t think that should be a deterrent.
Driedger advised growers who are interested in using the strategy to contact a good futures broker and not allow themselves to be deterred if it doesn’t make sense at first.
“It’s not as daunting as it might seem on the surface,” he said.