Selling 2002 Canola

[crusher]

I was wondering what would be a decent strategy to sell 2002 canola. Nov 2002 has huge $32 inverse to July. Does a person sell July futures, prepare to cover any margin calls and then flip to a contract with a grain company when they become available? I see Dec 2002 soyoil is holding its own, what implications does that have?

[charliep]

My thoughts are to be patient with new crop canola. We have a whole winter ahead with lots of uncertainty. International vegetable oil supplies are tightening and this is adding some optimism to canola prices (the reason for carry in prices to new crop in soybean oil). A humungus US soybean crop, signals for S. America to increase soybeans and uncertainty around meal demand are the negatives. An interesting note is that about 70 % of the value of canola comes from oil. New crop (2002) price signals over the coming year have to encourage at least a 25 % increase in Canadian canola acres.

The answer for a disciplined hedger might be different. In an old life with MNP, we would work on a decision like this (again highlighting we are taking a very disciplined hedging approach) from the aspect of breakeven analysis at different yields assumptions (low, normal, high). If I could breakeven plus reasonable marging for profit/risk on my low yield assumption, I would lock in somewhere between 25 to 50 % of my low yield production scenario - the amount would depend on my risk taking ability of my business/cash flow needs.

As an example, my breakeven costs are $180/acre. I want $20/acre margin so my target revenue is $200/acre. My low yield scenario is 25 bu/acre. My target for new crop pricing would be $8/bu or November 2002 futures of over $364/t based on a $12/t basis. I would start locking in 10 to 15 % bits through the winter at levels over this price.

How would others appoach this?

[charliep]

Just to get this thread going, does anyone have any thoughts about putting a 4 in front of nearby WCE canola futures ($400/t plus)? This would make for $8.50 to $9/bu canola across the prairies (depending on where you live)? If you do, what month will it occur in? What do you think of crusher question on new crop canola? How would you handle potential margin calls on a 2002/03 hedge?