There are two ways of looking at this chart:
1) It sucks, sucks, sucks, sucks, sucks and sucks;
2) Thank heaven!
Number One applies to all those who have a bunch of canola growing out in the field and don’t have a lot priced. A lot of farmers didn’t feel comfortable locking in many prices until the last couple of weeks, when they were able to know their acreage and get beyond the frost threat, and canola prices are way down from where they were. Now that $600 level, which hung around for quite a while so far this year, looks far from a sure thing to be able to get again. For these farmers, hope and anxiety are the way of the next few months. Do you hope for a rebound, or do you lock in what’s still available?
Read Also
Determining tariff compensation will be difficult but necessary
Prime minister Mark Carney says his government will support canola farmers, yet estimating the loss and paying compensation in an equitable fashion will be no easy task, but it can be done.
Number Two applies to those producers – and there are thousands of them this year – who locked-in prices during the spring or winter and now have found they aren’t able to grow a crop this summer. Across much of Manitoba and southeastern Saskatchewan many farmers have been able to seed less than 25 percent of their acreage. If farmers followed the usually conservative rule of thumb and locked-in 33 percent or so of their expected production, they could be in trouble if they aren’t able to produce even that low percentage of expected crop.
It all depends on how they priced. Did they sign contracts on crops that get act-of-God clauses? Did they use futures? How did they lock in those prices?
For those farmers, the turning down of canola prices is an act of heavenly mercy, that will allow many to get out of contracts signed at higher prices, or futures positions made in better times. If the market had moved the other way, the production disaster would have been compounded by a marketing disaster. Fortunately for these farmers, the market moved the other way and many will be able to shake off their obligations without much pain.
This situation has brought up once more my favourite hedging theme in the world: USE OPTIONS. I’ve been calling a few brokers today, and the ones who specialize in options strategies feel good about the situation of their clients, and about their own commitment to options. If farmers wanted to lock in new crop prices in the winter or spring, they were recommending they buy put options, giving them downside protection – which would be nice to have now – with no obligation to deliver. In options, all the risk is on the writer’s side, not on the buyer’s. It achieves the same result, minus the risk.
Except of the premium. That’s a cost and some guys just can’t seem to get over forking out the cash to pay the premium for the protection. That premium cost now would seem pretty small compared to the protection, relief and gain in put options made at anywhere near the $600 level. But it’s like Costco or other warehouse-style memberships: even though the rational sides of people’s brains tell them that the membership cost pales to insignificance compared to the savings they’ll make – likely in one trip – compared to what they’d be paying at most grocery stores, they can’t force their cold, cheap hands to pay the membership fee.
There’s still an opportunity to use options, brokers told me. They can still lock in decent prices at a decent premium. But is anyone interested, now that prices have fallen? Will everyone just hang on for the good prices to come back? However the fear vs. greed balance works out on the production and price outlook will answer that one. And as to paying the premium . . .
