MN Canola Council: Canola Hedging Tips

1. MN Canola Council: Canola Hedging Tips • Best way to hedge canola? Which market? Soybeans? Canola? Bean Oil? Why? • How do the mechanics of the hedge work? (Converting Can $/tonnes to US $/cwt and vice versa) • Can you give any tips on marketing canola using the hedge? Develop a canola marketing ‘system’?

2. Progressive Ag Goal: Helping Farmers Market Better • Progressive Ag will provide a Marketing plan which balances risk and reward, with discipline to carry out the plan. • Our goal is a modest 10-20 cents over existing marketing program.

3. Best market to hedge canola? • Winnipeg Canola futures? (20 metric tonnes/contract) • CBOT Bean Oil futures? (60,000 lbs/contract) • CBOT Soybean futures? (5,000 bu/contract) • Which one follows US canola prices better? That is one to hedge.

4. NDSU Study: Flaskerud, Dahl, and Wilson, November 2000 • “Price Risk Management for Canola Producers in the Northern Plains” • NDSU Ext. Publication EB-75 • Can be obtained by calling distribution center at (701) 231-7881, or on the web in the future at: • http://www.ext.nodak.edu/extpubs/market.htm

5. Best Way: Which futures to hedge in? • Test “correlation coefficients” to see which market follows US $ canola P’s best • Results: Winnipeg Canola Futures!! • WCE canola = .95 • CBOT bean oil = .86 • CBOT soybeans = .76

6. Converting WCE Can. $/Tonne to US dollars/cwt.: • Convert to US dollars by mult. By exchange rate (.66 Canadian $/USD) • Convert to $/cwt by dividing by 22.046 (2204.6 lbs in a metric tonne) • Ex. Convert C$297/tonne Nov’01 futures to US $/cwt. • $297 x .66 divided by 22.046 = $8.89/cwt • Velva normal harvest basis $-0.75

7. Mechanics: “Optimal Hedge Ratio”, or how much to hedge? • Normally hedge 1 bushel for every bushel in storage, but is that the best way to manage risk? NO!! • Studies show an amount a little less than 1 bushel actually is best for ‘risk management’ purposes for almost all futures hedges (basis risk) • What about canola futures? NDSU study concluded Optimal ratio = .8-.9

8. Mechanics: Ex. hedging 5,000 bu or 250,000 lbs.(167 acres @ 1500#/acre) • Optimal Hedge ratio of .84 • 1 contract canola = 20 metric tonnes or 44081 lbs or 441 cwt. • 250,000 lbs x .84 = 210,000 #/44081 equals 4.76 contracts • For every 50,000 lbs, hedge 1 contract WCE canola (or 5 contracts for example)

9. Converting US CFC prices/cwt to WCE C$/Tonne: • $8 Canola Cash Forward Contract (CFC) offered at Velva at harvest • Velva normal harvest basis $-.75 • $8 + .75 = $8.75/cwt. WCE futures • $8.75 divided by exchange rate (.66) x 22.046=$292.27. • If canola futures more than $292.27 (296.80 on 12/15/00), then hedge yourself. If CFC > WCE Nov, CFC.

10. Marketing Strategies: Basis, Seasonality, and Basic Plan • Basis - Low at harvest (Sept-Oct) of ($0.75) and peaks May-July at ($0.25) • Cash P Seasonality - bottom at harvest (Sept/Oct) and peak in Jan-April, with $1 rally average from harvest to April (1993-1999 data) • $.50 of gain from basis • $.50 of gain from futures going up

11. Basic Canola Marketing Plan • Sell 1/3 to 1/2 at planting (May) in a futures hedge at WCE or CFC (compare to see which is highest) • Do not plan to sell anything at harvest (buy back hedge if you have room?) • Sell remaining 1/2 or 2/3’s in cash market from Jan to April (or 5-8 months after harvest)

12. Market Fundamentals and Technicals: Use to refine plan • Need system to monitor fundamentals and technicals • Canola highly correlated with soybean prices due to dominance of world oilseed market by sheer size of soybean market. • Any study of canola fund./technicals needs to include a study of soybeans

13. In Marketing, Timing Is Everything! • “To everything there is a season, a time for every purpose under heaven: a time to be born, and a time to die; a time to plant , and a time to pluck what is planted…” Ecclesiastes 3:1-2. • A time to sell, and a time to store!!

14. AgMarketingWizard.com • The best, simplest, and most comprehensive marketing system for farmers in the World! • Based on the best systematic methods University professors have advocated for years, but brought down to earth so any producer can use it. Wizard will make it easy for farmers to do a good job of marketing.

15. AgMarketingWizard.com • Cost of basic service (Marketing Plan Wizard) = only $50!! Even adding other components still leaves >50% savings • Higher Quality Service: Individualized plan, better communication and better execution • Farmer can build his own market consultant, access to real-time research

16. AgMarketingWizard.com Toolkit Price List • “Marketing Plan Wizard - $50 (Req.) • “Basic Marketing Toolkit” - $25 • Pro Ag Rec’s/Targets - $100 • Pro Ag “Weekly” Mkt. Comments - $50 • Pro Ag “Daily” Mkt. Comments - $140 • Wiz Research - $25/each • “Yield Model” Estimates • “Price Models” • “Export Model” Projections • “S/D tables”

17. Soy P Model: Prices should average over Loan Rate

18. Soybean Exports: If blue line over red, bullish. Or, if red over blue, bearish

19. Soys bullish next 2 reports; demand hike and yield cut

20. Words of WisdomProverbs 11:26 • “People curse the man who hoards grain, but blessing crowns him who is willing to sell.” • Especially if prices are in the top 25% of historic prices (14 year range)!! But if prices at 20 year lows??