Most market analysts say the canola and world oilseed markets look flat as a prairie pancake for the rest of the crop year and into 2005-06.
Rallies are likely to be modest, giving only small hope to producers who use futures to lock in prices.
As well, many producers may assume that options are out of the question because option buyers, unless they are prepared to pay a large premium, buy options with trigger prices quite a few dollars out of the money.
In a market with little volatility, there is little chance of using those options and unlike buying or selling a futures contract, options aren’t virtually free.
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Buying an option costs a premium and even if the option is exercised, that premium is lost. An option premium is like a life insurance premium Ñ you don’t get it back if you die. You might get a policy payout, as you do with an exercised option, but the premium is spent.
However, farm marketing adviser Errol Anderson of Pro Market Communications is working with some of his clients to squeeze a bit of money out of the market with call options, regardless of the market’s condition.
He’s doing that by reversing the usual role of the producer in the options equation.
Instead of advising them to buy calls or puts, he is suggesting producers who want to use options in the next few months switch to writing options instead of buying them.
That way a producer can make a few extra dollars per tonne more than the market looks likely to provide.
Out-of-the-money call option writing provides a premium and allows room for a writer’s binned grain to move up in price so that it acts as a minor hedge.
With little prospect for big swings in the oilseeds market this winter, that may be the best hope for most producers.
An option writer takes on the obligation of the option if it is exercised and charges a premium for doing so.
“The underwriter pockets the premium in a flat market,” Anderson said.
The trigger point that the option writer sets determines how far in the money or out of the money the option is considered to be. For example, a canola call option with a trigger price of $350 per tonne is $50 out of the money if the current price of canola is $300 per tonne.
Anderson is recommending growers write options at least $50 out of the money because that means there is little chance of the option being exercised.
As long as a farmer has as much binned grain as he is writing call options for, he won’t be exposed to losses if the price goes up and the option is exercised, but he will lose the ability to benefit from price increases above the exercise price and will face the hassle of settling the exercised option.
Future pays
Anderson said $50 out-of-the-money calls on nearby months can bring a premium of $4 to $5 per tonne, while further-out months can bring more than $10 per tonne.
Options with closer-to-the-money exercise prices bring a much higher premium Ð now around $10 per tonne on nearby months Ð but expose the producer to a much higher chance that the option will be exercised.
Writing options in a flat market can be a good strategy, but a technical problem now complicates this strategy.
“The volume in Winnipeg (at the Winnipeg Commodity Exchange) is quite low,” Anderson said.
“Not much is trading, but I’m hoping as we get into the spring market that that will change.”
