Canola looks pretty profitable, but so do a lot of other crops

Examining Manitoba's break-even yield risk ratio

Before you think we’ll see canola seeded from fence post to fence post this year, it’s good to look at some numbers. And while canola gets a lot of news coverage because of its futures market, the good news this year is that most other crops are showing high prices as well.

However, while these strong crop prices will influence planting decisions, issues such as bin capacity, delivery logistics, crop diversification as well as rotation requirements and other agronomic factors will counterbalance decisions based on prices alone. Fortunately, preliminary gross margin comparisons and cost-of-production estimates from various sources indicate good profit potential for most crops. And even though prices have been strong for the past several months, current price trends and forecasts are still bullish, which could improve the profit picture.

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For instance, depending on your region in Saskatchewan, a lot of crops are showing equally good or even better gross margin estimate than canola like red and green lentils, feed barley, as well as yellow and green peas. Some of the smaller crops like flax, mustard, canary and chickpeas are showing similar strong margins too. In Alberta, farmers are also seeing some excellent prices for new-crop feed barley.

Here in Manitoba other crops like soybeans, corn and oats are all showing good margins and will compete with canola for acres. For example, although the Manitoba agriculture crop production cost guideline was published a couple of months ago in January and prices have changed since then, its analysis compares break-even yields with target or average yield.

It gives a sense of how much profit margin room there is to cushion potential negative production issues or price fluctuations associated with each crop.

Source: Manitoba Agriculture & Resource Development

Most importantly, with good crop prices across the board, you want to have access to a full range of marketing strategies including options and futures for those markets that are available such as canola, wheat, soybeans, corn and even oats. Since you don’t have the same marketing flexibility for other crops like lentils, peas, durum or barley, you might as well take advantage of hedging strategies for the ones that do have associated options markets.

Even if you think that prices are going nowhere but higher, there are option strategies to take advantage of that view but still implement some downside protection.

Although everything looks very strong right now, you don’t want to be too complacent and forget about capturing these good prices or ignoring the downside. Although, locking in grain for delivery with the elevators shouldn’t necessarily be your first or only marketing choice. While selling some production for bin space or cash flow makes sense, you don’t want to lock in too much since there is still a lot of weather and growing ahead of you.

So, another choice is using options. The flexible nature of option strategies gives you the downside price protection you need as well as the upside potential you want, all without locking in price or committing your grain for delivery.

However, as you can imagine in this environment, option protection isn’t necessarily cheap, but when new-crop canola futures are currently near C$630/MT, soybeans are US$12.50/bu. and corn is almost US$4.90/bu., it makes it easier to invest some money in option premiums. There are also strategies you can implement to reduce and minimize the premium you pay. Regardless of the option strategy you choose, it could be the best 25 cents, 50 cents or even 75 cents per bushel you’ve ever spent whether new-crop canola goes back down to $500/tonne or to $800/tonne, soybeans go to US$10/bushel or US$15/bushel or corn goes to US$4 or US$6/bushel.

Bottom line, we all know marketing can even be challenging in a strong up-trending environment, especially with the ever-present possibility of a dramatic price reversal.

Fortunately, a rising tide lifts all boats and is a good environment for hedging strategies, particularly flexible option-based strategies implemented throughout the crop year. Some producers are more anxious to sell at these levels, while others are OK to wait and see what develops. Either way, you want to have marketing alternatives that give you the downside price protection you need as well as the upside potential you want, without locking in price or committing too much production for delivery this early in the year.

About the author

Columnist

David Derwin is a commodity portfolio manager with PI Financial Corp. The views here are his own, presented for educational purposes, rather than as specific market advice. For a copy of the complete research study “Farming Big Data — Myths, Misperceptions & Opportunities in Agriculture Commodity Hedging” contact him at [email protected]

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