Barley Dropping

[graham_gilchrist]

http://exchanges.barchart.com/intra/wpg/wpgdabz3.htm

With Barley going to $120 (December)and being in the avergage range for long term barley prices, a few hog producers are asking if they should be purchacing the right to buy to protect against a rise and then purchase the right to sell to take advantage of any further decline in price?
Comments?
gg

[melvill]

Graham, whether you realize it or not, you're really asking two questions.

A "normal" hedge for feedgrain users is to buy feedgrain futures as a price risk management strategy to protect against prices rising at a later date. If western Canadian hog producers want to protect themselves against rising barley prices, a hedge strategy would be to buy Western Barley futures - probably Dec and Mar futures.

It is not prudent to try to time the market to buy those western barley futures at the bottom of the market. The success rate at picking the market bottom, or market tops for that matter, is extremely small.

Another way to "hedge" a barley user's needs is to "purchase the right to buy" barley - in other words buy a western barley call option. Using options requires more experience than does using futures. The other problem is that western barley options trade in very small volumes so getting the transaction done would be tricky. Another choice is to use corn call options. Corn and barley markets don't track perfectly and, since corn options are in US$, there is currency risk, as well.

A feedgrain user that "purchases the right to sell" ie buys a put option, to try to take advantage of any further price decline is not managing price risk. Buying puts in this case is purely a speculative investment not related to price risk management. That doesn't mean it may not be a good investment. However, the volume of barley puts traded is pretty small. Another choice might be to buy corn puts but premiums for any options at this time of year tend to be quite high because futures volatility is higher during the growing season.

Other's thoughts?

[TOM4CWB]

Graham;

A hedge for a hog producer would to be buy the Dec. Barley futures, and sell the pork production.

If the calculation turns a profit, then this is a prudent risk management strategy. If hedges are done, your bank should understand what you have done, and be ready with a line of credit if margin calls occur.

The Barley futures are close to market value, but how close the cash and hog futures (basis risk) converge is another risk that needs to be accounted for in this hedge.

All the best, I sure hope someone can make some money off these cheap barley prices!

[cropduster]

Had a brief visit with MR.Ritter this am.Although not specifically asked,he did say they really don`t have a feed barley marketing program and haven`t for a few years.Am surmising with a non existant(or at least drastically reduced0 fed cattle market in AB.we are going to be able to fill hockey rinks with this years feed grains.That is remembering they do `return all profits to the producers`!!!!

[TOM4CWB]

Cropduster;

We are in a depression, and this is why barley bids in AB are less than 2/bu.

The market does not at all justify old crop barley prices this low, but without an export market we are stuck... there is no arbitrage, when supply even gets close to balanced, feed grain prices drop through the floor.

I am sure glad I took the SPE on crop insurance, maybe the disasterous job the CWB does will lite a little fire under the AB gov, since they are now going to have to pay the price for CWB folly!

Is there any reason the CWB monopoly should handle feed grains like feed barley and feed wheat, in what appears to be a CWB export restriction on "designated area" feed grains?

In 1996, Jack Gorr asked the feed barley question to the Western Grain Marketing Panel, everyone on the panel agreed then that CPS and feed barley should be given marketing choice.

Here we are in 2003, seven years later, and Dr. Dolittle Goodale has still not fulfilled his leadership obligations to implement the Western Grain Marketing Panel KEY market choice proposals.

SHAME!

Was relying on feeding our grain to livestock to export it, such a good idea?

Any time an industry is overbuilt on because of gov. regulation... it is a recipe for disaster... and we all know it all too well.

So what do we do Charlie, how do we get barley out from under the CWB?

[rodbradshaw]

I'm cranky and this heat isn't helping things. We better get this border open to send feed grains south with out having to pay a usery payment to the CWB. If the border ever opens for cattle we better be able to send grain to follow them to arbitrage the market as we can't be held ransom by the CWB and the feeding industry that are all to anxious to buy the cheapest thing going.

I appreciate that we have had the highest price market for feed barley the last couple of years but I also remember when the premium of Montana did not correspond to the short truck ride from Lethbridge.

If the CWB is not going to have a sales program for feed grain then let the market open as happened to oats and let the chips fall where they may.