As of last week farmers could lock in $16 to $17 a bushel new-crop canola, but the spectre of drought may discourage some from pre-selling as much as they would if it wasn’t so dry.
It’s hard not to take advantage of such strong prices. And while there’s no guarantee, odds are they will likely be lower in fall. But nobody knows. If there’s a crop failure prices could even be higher.
The risk in pre-selling any crop is not being able to deliver it and having to either buy the physical grain to deliver or buying your way out of the contract.
Most Manitoba farmers have crop insurance as a backstop, but the maximum coverage is 80 per cent of long-term average yield. Moreover, in January Manitoba Agricultural Services Corporation (MASC) set the value used when payouts for new-crop canola are triggered at $11.23 a bushel — $5 to $6 less than what farmers can lock in.
If only there was a way to change MASC’s canola value retroactively.
Turns out there is.
Last year MASC introduced its Contract Price Option for canola and peas (link to PDF on the MASC website).
“If a farmer only locks in a small portion of their canola we take a weighted average of what was locked in and we will set a unique price for them,” David Van Deynze, MASC’s chief product officer said in an interview May 6.
“If they (farmers) lock in every bushel they are seeding and planning to harvest at a certain price, say $14 a bushel, and they show us that information, we can adjust their price to 14 bucks under the insurance program. The cost is proportional to your increase in coverage. So if you get 10 per cent more coverage you’re going to pay 10 per cent more premium.”
Originally the option was devised to give farmers growing speciality oil canola, that routinely earns a premium price over regular canola, the option to adjust the value of canola used to calculate insurance payouts.
“This could be the year that people really test this new option of ours because of the disparity between what we’re offering for values and what guys can still lock in for,” Van Deynze said.
Naturally, the option only applies to the amount of canola pre-sold up to a maximum of the farmer’s individual insurance coverage.
Here’s one example of how it works. A farmer is growing 1,000 acres of canola. Their long-term average yield is 40 bushels an acre and they have 80 per cent coverage, which is 32 bushels an acre coverage.
If the farmer locks in a price of $16 a bushel for their full coverage of 32 bushels an acre and the crop is written off the farmer will get a payout based on $16 a bushel instead of $11.23.
The farmer can use the money to buy canola to deliver to the buyer.
While the option reduces some of the risk of pre-selling it’s not eliminated, Van Deynze said. If the spot price for canola at delivery time has risen to say $18 a bushel the farmer will be out $2 a bushel after buying canola to fulfil their contract or settling with the buyer.
Often if one farmer has a crop failure, especially in a dry year, many other farmers have too. If production is down, prices usually rise.
If a farmer locks in a higher canola price on just a portion of volume of canola they are insured for, the Contract Price Option will reflect that higher price on that portion.
Here’s an example. A farmer is growing 1,000 acres of canola. Their long-term average yield is 40 bushels an acre and they have 80 per cent coverage, which is 32 bushels an acre coverage.
The farmer locks in $16 a bushel on 20 bushels an acre of production. Twenty bushels is 62.5 per cent of their full coverage of 32 bushels an acre.
If a crop insurance payout is triggered, payments will be based on the weighted average of their locked-in price and the MASC price.
To calculate the weighted average in this example, take $16 a bushel on 62.5 per cent of their coverage, or $10 a bushel ($16 a bushel X 62.5 per cent = $10 a bushel) and take $11.23 on the other 37.5 per cent of their coverage, or $4.21 a bushel ($11.43 a bushel X 37.5 per cent = $4.21) and add them together.
If you combine $10 and $4.21, the farmer gets $14.21 a bushel instead of $11.23.
As noted above, for every per cent increase in coverage under the Contract Price Option, there’s a per cent increase in premium the farmer must pay.
To take advantage of the Contract Price Option farmers must submit their contract details to MASC no later than June 30, 2021, the same deadline as for their Seeded Acreage Reports.