From the unexpected file, should a person be buying Canola Call Options here?

Commodity Marketing

Tools

From the unexpected file, should a person be buying Canola Call Options here?

May 23, 2019 | 21:27 1 To be clear, I am still very concerned about a continued move lower for the oilseeds and believe having price protection is very prudent risk management. I still believe holding the soybean or canola puts previously discussed is important.

The idea of buying canola call options is primarily to protect oneself against a surprise rally if you have delivery obligations on presold production and a drought reduced crop potential.

The burdensome supplies and trade implications are well documented. Matters could get worse for soybeans if the planting delays in the US Midwest result in corn acres being switched to soybeans. The planting deadlines are fast approaching for corn and the flooding rains only seem to be getting worse. The new farm payment just announced will pay a per acre rate regardless of what is seeded (but something has to be planted to get the payment). That is were things could get worse for soybeans.

On the other hand, the delays could last long enough that soybean acres are lost as well. That would combine with an expected decline in yield (due to seeding date) and a likely strong corn market to trigger fund short covering. With money manager positions at a record net short for soybeans (168,835 contracts or 840 mil bu net short) and just off the record for canola, a weather rally could be violent. Keep in mind, the money managers have had a net long position of 200-250,000 contracts on multiple occasions. As such, that one group alone could buy over 2 bil bu of soybeans just to go from their extreme net short to extreme long.

Back to the original point, if the drought conditions in Western Canada don't improve and actually start gaining some market attention, they will certainly add urgency to any rally. That's when having canola calls in place to give you the option to own futures on any tonnes that are presold would be helpful.

As of today, Nov Canola closed at $455. Nov $470 calls closed at $8.20/t, $480 calls at $5.80 and $490 calls at $4.10.

Just a thought... Reply With Quote
May 24, 2019 | 05:06 2 No reason for buying calls now.

Having said that our business is based on whatever falls on us out of the sky so might as well go for it Reply With Quote
farmaholic's Avatar May 24, 2019 | 06:22 3 470 - 455 = 15, 15 - 8.20 = 6.80, 6,80 ÷ 44.092 = 15.4 cents. Not much of a reward.

480 - 455 = 25, 25 - 5.80 = 19.20, 19.20 ÷ 44.092 = 43.5 cents. Getting better.

490 - 455 = 35, 35 - 4.10 = 30.90. 30.90 ÷ 44.092 = 70 cents.. Interesting

So help me out. Does owning the call give you the right to sell it at the strike price?

On presold canola would this be a bad strategy, but who would presell at 455?

If you presold at higher than the Nov close. Your potential benefit shrinks.



Just trying to understand it.

Imagine, a market based thread!
Last edited by farmaholic; May 24, 2019 at 06:25.
Reply With Quote
May 24, 2019 | 07:21 4 Farma, sell some at the money puts, they would pay for the call purchase and put money in your pocket for the day.🤨

There is a very fine line between hedging and speculation

I don’t know if there is enough blood in the street yet to look for a bottom ( bottom puckers are cherry pickers😀) Reply With Quote
May 24, 2019 | 07:34 5
Quote Originally Posted by farmaholic View Post
470 - 455 = 15, 15 - 8.20 = 6.80, 6,80 ÷ 44.092 = 15.4 cents. Not much of a reward.

480 - 455 = 25, 25 - 5.80 = 19.20, 19.20 ÷ 44.092 = 43.5 cents. Getting better.

490 - 455 = 35, 35 - 4.10 = 30.90. 30.90 ÷ 44.092 = 70 cents.. Interesting

So help me out. Does owning the call give you the right to sell it at the strike price?

On presold canola would this be a bad strategy, but who would presell at 455?

If you presold at higher than the Nov close. Your potential benefit shrinks.



Just trying to understand it.

Imagine, a market based thread!
No, a call gives you the option to buy a futures contract at the strike price.

So, in the above example Nov futures would have to go above 478.20 for your 470 call option to be in the money. (this is not including the commission charged by the broker to purchase the option)

If, for example, Nov canola went to $550 because of a poor 2019 crop you could exercise your option to purchase a Nov futures contract for 470 and net 71.80 per tonne. (550-478.20)
Of course you have to turn around and sell the just purchased contract to cash in on the deal. Could be some slippage in a fast market.

So, you presold some canola yesterday for Nov delivery for $9.71 (428.12/t)

Come early October it's clear the crop was a bust and Nov futures have gone to 550
You exercise your call, sell the contract and bank 499.92 for your canola. (428.12+71.80)

Or if you didn't harvest any canola you can use the call option money to help buy out your delivery contract and lesson the pain, which would be substantial

Who would presell at 455? Who indeed, with the plants just breaking the surface and struggling to survive..... Reply With Quote

  • May 24, 2019 | 08:17 6 Perfect explanation Farming101.

    This can also apply for previous canola sales. If you had contracted canola for fall delivery when Nov futures were $490/t, buying a $490 call would be very cheap insurance that you would be out very little should 2019 turn into a disaster (or suffer very little harm if you had to buy out a delivery contract). Reply With Quote
    farmaholic's Avatar May 24, 2019 | 08:37 7 Thanks for replies.
    I will look at them more in depth later.

    How many people actually do options?

    Obvioulsy I don't. Reply With Quote
    SASKFARMER's Avatar May 24, 2019 | 08:43 8 We used this before and will look at again Reply With Quote
    May 24, 2019 | 09:02 9 Not to shit on marketing ideas BUT you guys realize the US soybean farmer got 1.65 USD per bushel on their soybeans with no money spent....and are about to get another payment....


    1.65usd is 2.20 cdn.....

    They are getting close to 4 bucks cdn on every soybean bushel....from the government...And I doubt very many cheques will be sent back...

    Thats quite a marketing system they have in the states.


    And our prices are set off it....
    Last edited by bucket; May 24, 2019 at 09:23.
    Reply With Quote
  • 1 Like


  • May 24, 2019 | 10:03 10 Thank you for a marketing related thread, please contribute more often. And so far the usual suspects haven't even showed up to blame it all on global warming and to bash Trump. Reply With Quote
    blackpowder's Avatar May 24, 2019 | 11:50 11 After years of dabbling.
    I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
    I sometimes lock the basis.
    Hedges are lifted the day I sell physical.
    I do forward sell some. Sometimes a lot. This is kept out of hedge program.
    Theoretically, I should have my startup cash in account upon retirement.
    So far I have a reasonable excess.
    (Markets downtrending last couple years).
    You can hire someone to operate this if you do not have the discipline or comfort. Reply With Quote
    May 25, 2019 | 09:42 12
    Quote Originally Posted by blackpowder View Post
    After years of dabbling.
    I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
    I sometimes lock the basis.
    Hedges are lifted the day I sell physical.
    I do forward sell some. Sometimes a lot. This is kept out of hedge program.
    Theoretically, I should have my startup cash in account upon retirement.
    So far I have a reasonable excess.
    (Markets downtrending last couple years).
    You can hire someone to operate this if you do not have the discipline or comfort.
    blackpowder, thanks for posting. Marketing is about all about discipline and solid business management. Reply With Quote
    farmaholic's Avatar May 25, 2019 | 09:47 13 Sometimes it doesn't matter how much "market power" you possess...sometimes it works in your favor other times not. Greed and obstinance aren't good marketer qualities. Reply With Quote
    May 25, 2019 | 10:03 14
    Quote Originally Posted by errolanderson View Post
    blackpowder, thanks for posting. Marketing is about all about discipline and solid business management.
    Now Errol ...can you explain the close to 27 billion USD of marketing discipline and business management american farmers are receiving????


    Canola is priced off the soybean market and that 27 billionUSD is affecting every one of our commodities here in western Canada....

    Just keep burning equity boys....its all good... Reply With Quote
  • 1 Like


  • May 25, 2019 | 10:08 15 Thoughts on option purchase whether puts (to guard price downside) or calls (to reopen price upside).

    Buy quality or quantity? Typically, we suggest to growers to purchase quality meaning at or in the money options, if possible. Realize premiums are more expensive, but some growers have protected their crop with Nov $490 and $500 put options, back when they cost $15 to $20/MT. Out of the money options are cheaper, but you will need a homerun to cash them out in this lethargic market.

    It doesn’t matter what commodity you pick, there are no homeruns to be had. To me, rallies like current corn should be viewed as a hedging opportunity. Trump’s trade war has severely messed up global trading patterns. We aren’t going back to the good old days anytime soon.

    Many growers use options as it does help maintain marketing discipline (blackpowder’s post). There are no margin call concerns as a purchaser of a put or a call option. We have seen many times in our career where an option position was devaluing and appeared going to expire worthless only to spring back to life quickly. The problem with futures trading is; margin call grief can knock you out of your position at the worst possible time.

    Hope this makes some sense . . . . Reply With Quote
    May 25, 2019 | 10:40 16 Could you explain the implications of the 27 billion????? Reply With Quote
    blackpowder's Avatar May 25, 2019 | 11:43 17 As a very small grain company, I use some of the same price risk tools the larger companies use.
    It's not VooDoo. Just a self managed price risk insurance.
    Sometimes I think because of our socialist/communist history, we are conditioned not to see clearly.

    My account fills in down turns and drains in upturns. Over the long haul probably no difference if you never did.
    But my current canola inventory is hedged at $500 and today, right now, I can use that extra cash. Secured while I needed to aerate and find a home for green ( shop basis). Locked in before the Chinese closed the door.
    The cost of running the program likely isn't any more than to insure your machinery per$1000. Likely less if you write options. Small loss in a flat year.

    This started as a marketing thread and turned into a group of witch doctors knashing their teeth over an eclipse. Reply With Quote
    May 25, 2019 | 13:58 18 For the benefit of those interested but uncertain, I think it should be pointed out that when trying to decide on the quality (and price) of an option, the motivation behind purchasing it in the first place should be taken into account.

    If it is the primary tool for protecting against a price decline and you expect that very well could occur, a higher priced option with very good protection makes the most sense (as Errol suggests).

    In the original post, if a deferred delivery contract was the protection against the likely weakening market but a call was purchased in case the outlook changed, you likely wouldn't want to purchase an expensive option. You are merely protecting against the unlikely event that prices rally and you want or need to be able to take advantage of it.

    Risk management takes many forms and as anyone that had to buy themselves out of a contract in a rising market due to a crop failure knows, it can be very damaging. Reply With Quote
    farmaholic's Avatar May 25, 2019 | 14:49 19
    Quote Originally Posted by blackpowder View Post
    After years of dabbling.
    I use futures markets to hedge half expected crop, adjusted upon harvest. Either options strategies or futures short. I never re-own. Long the bin only.
    I sometimes lock the basis.
    Hedges are lifted the day I sell physical.
    I do forward sell some. Sometimes a lot. This is kept out of hedge program.
    Theoretically, I should have my startup cash in account upon retirement.
    So far I have a reasonable excess.
    (Markets downtrending last couple years).
    You can hire someone to operate this if you do not have the discipline or comfort.
    Or my obvious lack of knowledge. Reply With Quote
    farmaholic's Avatar May 25, 2019 | 15:09 20
    Quote Originally Posted by blackpowder View Post
    Sometimes I think because of our socialist/communist history, we are conditioned not to see clearly.
    Yup, that could be my excuse.

    Before we started growing open market special crops, of which many had no active futures trading or options to buy, I had no need to know how the futures market and it's options functioned. We were even considered late to the canola growing trend.

    All that said, there is no reason I couldn't have dabbled in the markets, I didn't have to own a ball to play the game.

    In my "twilight" years of my farming career, is it something I really need to be doing?

    I don't mind DDCs when quality and quantity are known.

    I don't like basis contracts because I hate committing to one Company if there are multiple viable other Company options available. What appears good at the moment may not be later. But who knows!

    Sadly I would say markets are completely dysfunctional right now, politics..... Reply With Quote
    blackpowder's Avatar May 25, 2019 | 15:47 21 I hate basis contracts myself. Lost potential when a "special" offered.
    I use them mostly because I'm short storage. Guarantees off combine delivery without as much non delivery risk.
    Reserves space until you can fill.
    Basis changes naturally and can be an indicator until they "gotta fill a train" lol.
    Grain is food and as such will always be 90% politics.
    Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated. Reply With Quote
  • 1 Like


  • farmaholic's Avatar May 25, 2019 | 16:56 22
    Quote Originally Posted by blackpowder View Post
    Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated.
    Good to know I probably never missed much. Reply With Quote
    May 25, 2019 | 21:47 23
    Quote Originally Posted by blackpowder View Post
    I hate basis contracts myself. Lost potential when a "special" offered.
    I use them mostly because I'm short storage. Guarantees off combine delivery without as much non delivery risk.
    Reserves space until you can fill.
    Basis changes naturally and can be an indicator until they "gotta fill a train" lol.
    Grain is food and as such will always be 90% politics.
    Honestly, in the grand scheme of things, having a trading account won't be a mortgage lifter, but being involved encourages you to stay educated.
    Rolling basis contracts a huge cost to growers as grower pays the cost-of-carry between the futures. Rather than roll a basis contract which is nicknamed the ‘procrastination contract’ and if you are bullish, cash the cheque from the grain co and replace with a call option. Paying basis rolls is a heavy cost to the grower unless there is a sustained bullish market.

    If you purchase a call and the market dives further, you are on the hook for just the premium of the call, no more, not the cost of the whole bin unpriced. Plus, grain storage can be more a liability than an asset. Move the grain, use your trading acct to manage your price management. Reply With Quote
    farmaholic's Avatar May 26, 2019 | 00:15 24 Errol, "Like" and "Dislike" your last comments.

    Like the statement about rolling the basis and paying the cost of carry AND probably a roll fee as well. And how just buying the call can reduce risk/cost.

    Really dislike the comment of "move the grain".....if everyone just did that there would be no need for grain to rally. Image if everyone just dumped their grain and used trading accounts. First affect would probably be a price collapse, then once all the grain was in commercial's ownership(although alot of that may still be in the farmer's bins) what need would there be to increase prices to "open bin doors"?

    There is something to be said about ownership.

    Attended a GrainCo meeting last winter, seems all "their" marketing schemes and scams offered to Producers were designed to guarantee them a supply coming up their driveway but transfer, or leave, the pricing risk with the Producer.
    I'm to cynical for those meetings! Reply With Quote
  • 1 Like


  • May 26, 2019 | 06:16 25 Anyone want to hazard a guess on the 27 billion dollar question and it's effect on markets.?

    Is that what they consider a black Swan event.....

    Sure looks like it is affecting our markets. ...or will be...

    Price protect your crop but Richardson isn't big enough not to declare a "force majeur" if this chinathing isn't cleared up....

    It was only when the brass at Richardson made the call that it got any traction....

    But farmers will still be the ones with the most to lose. ... Reply With Quote
    May 30, 2019 | 15:36 26 Just a quick update for those interested.

    Nov canola closed today at $473/t so the $470 calls are in the money already. The calls closed today at $16.20/t, up from the $8.20/t mentioned in the original post. For those uncertain, the $16.20 is made up from the combination of the $3/t you would be profitable if you exercised them and were long from $470 plus $13.20/t time value that traders are willing to spend for the right to be long at $470 until the Oct 25th expiry.

    Given the poor start to the year and wild weather markets we are beginning to see, I still believe this would have been a good risk management strategy for anyone who had priced fall delivery contracts.

    It still will be on setbacks. Reply With Quote