Price Risk Management for Canola
Producers in the Northern Plains - Continued
EB-74, November 2000
Comparison of Marketing Strategies
Preharvest and harvest/postharvest marketing strategies are compared for the years 1994-1999. The illustrations provide a systematic framework for analyzing and planning marketing strategies. Caution must be exercised in generalizing about what might happen in the future based on the illustrations since relatively few years were analyzed. Illustrations matching future expectations can be examined for possible strategy outcomes. A fee of $.07 per hundredweight ($30 per contract) was specified for each transaction (purchase and sale) of futures and options. A hedge ratio of 1:1 is used in the balance of the publication.
Preharvest Marketing Strategies
Preharvest marketing strategies were initiated during May in this analysis. May was selected because the 1994-99 November futures contracts for canola peaked in May, on average. November was used because of a substantially higher volume in that contract than in the September contract in recent years. Strategies are presented in Tables 8-10 and summarized in Table 11.
Table 8. Net price received by hedging in November futures
from May to August.a
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---- November Futures ---- Cash Net
May August Gain/Loss August Price
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1994 12.40 11.90 0.43 11.36 11.79
1995 13.18 13.36 -0.25 11.82 11.57
1996 14.70 14.20 0.43 13.64 14.07
1997 12.58 11.87 0.64 11.78 12.42
1998 12.08 10.58 1.43 9.98 11.41
1999 9.07 8.55 0.45 7.96 8.41
Average 12.34 11.74 0.52 11.09 11.61
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a Using average monthly futures prices, total
transaction cost of $.07 per hundredweight,
average August cash prices at Velva, North
Dakota, and prices in U.S. dollars per
hundredweight.
Table 9. Net price received by buying November put options
at-the-money in May and offsetting in August.a
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-- November Put Options -- Cash Net
May August Gain/Loss August Price
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1994 0.66 0.79 0.06 11.36 11.42
1995 0.87 0.44 -0.50 11.82 11.32
1996 0.66 0.53 -0.20 13.64 13.44
1997 0.43 0.62 0.12 11.78 11.90
1998 0.47 0.65 0.11 9.98 10.09
1999 0.47 0.57 0.03 7.96 7.99
Average 0.59 0.60 -0.06 11.09 11.03
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a Using mid-month premiums, total transaction cost
of $.07 per hundredweight, average August cash
prices at Velva, N.D. and prices in U.S. dollars
per hundredweight.
Table 10. Net price received by hedging from May to August in
November canola futures and by buying November call options
three-strikes out-of-the-money in May and offsetting in August.a
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---------- Gain/Loss ---------- Cash Net
Futures Call Options Total August Price
-----------------------------------------------------
1994 0.43 -0.42 0.01 11.36 11.37
1995 -0.25 -0.19 -0.44 11.82 11.38
1996 0.43 -0.59 -0.16 13.64 13.48
1997 0.64 -0.31 0.33 11.78 12.11
1998 1.43 -0.30 1.13 9.98 11.11
1999 0.45 -0.21 0.24 7.96 8.20
Average 0.52 -0.34 0.19 11.09 11.28
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a Using average monthly futures prices, mid-month
premiums, total transaction cost of $.14 per
hundredweight, average August cash prices at
Velva, N.D., and prices in U.S. dollars per
hundredweight.
Table 11. Summary of preharvest marketing strategies.
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Average Standard
Strategy Price Deviation Minimum Maximum
-----------------------------------------------------
Cash (No Hedge) 11.09 1.76 7.96 13.64
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Futures Hedge 11.61 1.68 8.41 14.07
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Options:
Put 11.03 1.68 7.99 13.44
Synthetic Put 11.28 1.58 8.20 13.48
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Futures Hedge
Hedging in the November futures contract during May and offsetting in August was the most profitable preharvest strategy (Tables 8 and 11). This strategy provided a hedging profit of $.52 per hundredweight, on average, during 1994-99, which yielded a net price of $11.61 versus an average August cash price of $11.09. Hedging returns ranged from a minus $.25 to $1.43. Hedging returns were negative during only one year of the six.
Options
November at-the-money put options were purchased in May and offset in August (Tables 9 and 11). Option returns were a minus $.06 per hundredweight, on average, during 1994-99, which returned a net price of $11.03 versus an average August cash price of $11.09. Returns ranged from a minus $.50 per hundredweight to $.12. Returns were negative two years of the six.
Synthetic put options were implemented in the November contract during May and offset in August (Tables 10-11). The futures hedge presented in Table 8 was used along with call options. The options were purchased three strikes out-of-the-money to capture a portion of significant increases in the futures market that might materialize, partly to manage price risk and partly to manage margin requirements. The call options lost $.34, on average, during 1994-99. A net price of $11.28 resulted versus an average August cash price of $11.09.
Summary
The preharvest futures hedging strategy was far superior to the other preharvest marketing strategies. Not only was the highest average price achieved but it was achieved with considerably less variability than from the cash sales at harvest strategy. The futures hedge also achieved the highest minimum and maximum prices of all the strategies.
Harvest and Postharvest Marketing Strategies
Canola selling prices at Velva net of storage costs for 1994-99 are presented in Figure 26 and Table 12. Storage costs included an in/out charge of $.20 per hundredweight plus a cost per month equal to 10 percent (annual basis) of the price for the previous month. Futures and options strategies are presented in Tables 13-16 and summarized in Table 17.
Figure 26.
Table 12. Profitability of storing canola: August cash sales
versus the most profitable sales month.a
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Most Profitable Sales Month b
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August Storage Net
Price Month Price Costs Price
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1994-95 11.36 Dec 13.04 0.58 12.46
1995-96 11.82 May 13.86 1.11 12.75
1996-97 13.64 Augc 13.64 13.64
1997-98 11.78 Augc 11.78 11.78
1998-99 9.98 Nov 11.06 0.45 10.61
1999-00 7.96 Augc 7.96 7.96
Average 11.09 11.89 11.53
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a At Velva, N.D., in U.S. dollars per hundredweight,
where net prices are prices net of storage costs.
b Sales made during the month of highest returns net
of storage costs.
c No storage was the most profitable.
Table 13. Gain/loss from buying canola March futures in
August and offsetting in February.a
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March Futures
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August February Gain/Loss Net Price
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1994-95 11.96 14.34 2.31 13.67
1995-96 13.83 14.02 0.12 11.94
1996-97 14.40 13.68 -0.79 12.85
1997-98 12.01 12.75 0.67 12.45
1998-99 10.86 10.32 -0.61 9.37
1999-00 8.84 7.93 -0.98 6.98
Average 11.98 12.17 0.12 11.21
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a Using average monthly futures prices, total
transaction cost of $.07 per hundredweight, and
prices in U.S. dollars per hundredweight.
Table 14. Gain/loss from buying canola May/June futures in
August and Offsetting in April.a
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Futures in the May Contract
During 1997-00 and June
Contract During 1994-96
-----------------------------
August April Gain/Loss Net Price
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1994-95 12.05 14.27 2.22 13.58
1995-96 14.16 15.12 0.96 12.78
1996-97 14.43 13.73 -0.71 12.93
1997-98 12.07 13.11 1.04 12.82
1998-99 11.01 10.02 -0.99 8.99
1999-00 8.98 8.36 -0.62 7.34
Average 12.12 12.44 0.32 11.41
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a Using average monthly futures prices, total
transaction cost of $.07 per hundredweight, and
prices in U.S. dollars per hundredweight.
Table 15. Gain/loss from buying canola January call options
at-the-money in August and offsetting in December.a
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January Call Options
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August December Gain/Loss Net Price
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1994-95 0.58 2.47 1.82 13.18
1995-96 0.59 0.52 -0.14 11.68
1996-97 0.79 0 -0.86 12.78
1997-98 0.36 0.32 -0.11 11.67
1998-99 0.32 0.97 0.58 10.56
1999-00 0.40 0 -0.47 7.49
Average 0.51 0.71 0.14 11.23
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a Using mid-month premiums, total transaction cost
of $.07 per hundredweight, and prices in U.S.
dollars per hundredweight.
Table 16. Gain/loss from buying canola January call options
three-strikes out-of-the-money in August and offsetting in
December.a
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January Call Options
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August December Gain/Loss Net Price
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1994-95 0.25 1.49 1.17 12.53
1995-96 0.25 0 -0.32 11.50
1996-97 0.42 0 -0.49 13.15
1997-98 0.09 0 -0.16 11.62
1998-99 0.07 0.1 -0.04 9.94
1999-00 0.15 0 -0.22 7.74
Average 0.21 0.27 -0.01 11.08
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a Using mid-month premiums, total transaction
cost of $.07 per hundredweight, and prices in
U.S. dollars per hundredweight.
Table 17. Summary of postharvest marketing strategies.
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Average Standard
Strategy Price Deviation Minimum Maximum
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Cash (No Hedge) 11.09 1.76 7.96 13.64
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Selective Storagea 11.53 1.85 7.96 13.64
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Futures:
Aug to Feb 11.21 2.31 6.98 13.67
Aug to April 11.41 2.36 7.34 13.58
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Options:
Call - At Money 11.23 1.87 7.49 13.18
Call - +3 Strikes 11.08 1.79 7.74 13.15
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a Sales made during the month of highest returns net of
storage costs. Statistics include sales during August
(no storage) as well as other months. Storage was
most profitable during three of the six years analyzed.
Harvest Sales
Selling canola in August was more profitable than storage during 1996, 1997 and 1999 (Tables 12 and17). During those years, the average August cash selling price was $11.13. For the six-year period, the average August cash selling price was $11.09.
Storage was profitable during 1994, 1995 and 1998. During those years, storage provided an average net selling price of $11.94 versus an average August cash selling price of $11.05, in effect, a return to storage of $.89, on average. Note that this analysis assumes that sales are made during the month of highest returns net of storage costs. The practicality of doing this is addressed under "Summary" of harvest and postharvest marketing strategies.
A storage hedge in August was more profitable than cash sales in August during only one of the six years (results are not presented in a table). Only in 1998 was a storage hedge more profitable than selling cash canola. Selling the July futures in August and offsetting in May would have provided a hedge profit of $.16 per hundredweight net of storage costs versus selling at $9.98 in August.
Futures
Futures strategies focused on selling the cash canola at harvest and replacing the sold canola with a long futures positions. March futures were purchased in August and offset in February (Tables 13 and 17). May/June futures were purchased in August and offset in April (Tables 14 and 17). The May contract traded during 1997-00 and the June contract traded during 1994-96.
Holding a May/June futures position was more profitable, on average, than holding a March position during 1994/95-1999/00. The March futures position gained an average of $.12 versus $.32 for the May/June position. Gains resulted in three of the six years in both positions.
The best gain in the March position was $2.31 and in the May/June position it was $2.22. The worst loss in the March position was $.98 and in the May/June position it was $.99.
Call options were purchased in the January contract during August. Limited volume could make the more distant contracts somewhat difficult to purchase. The call options were purchased in mid August and sold in mid December.
At-the-money (ATM) call option results are presented in Tables 15 and 17 and out-of-the-money (OTM) call option results are presented in Tables 16 and 17. The call options were three-strikes OTM.
The ATM calls gained an average of $.14 while the OTM calls lost $.01, on average, during the seven-years. The ATM calls were profitable during three of the seven years. The OTM calls made money during one of the seven years.
Summary
Selective storage was the most profitable harvest/postharvest strategy (Table 17). The highest average price was achieved through selective storage, and with a smaller increase in price variability than with most other strategies. The minimum price received was no worse than from the cash sale at harvest strategy while the high prices received from both were equal.
The challenge with selective storage is to determine which years to store and then when to sell. The net selling price in Table 2 must be calculated (see "Storage" for an explanation of Table 2) whenever futures prices and basis expectations significantly change until a sell signal is given. In addition, judgement must be exercised since the table of calculations does not always give the correct signal; it is only a guide.
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EB-74, November 2000
