The increase from 1.25 per cent is the base rate retail banks pay for short-term loans, but consumer rates for mortgages, lines of credit and other loans usually follow.

By hiking the rate, Bank of Canada governor Stephen Poloz is signalling confidence in the Canadian economy to deal with mounting trade concerns.

Strong growth in the U.S., strong exports and business investments are offsetting U.S. President Donald Trump’s trade policies.

“Gross income is still projected to be up in 2018. Despite all the trade tensions and lower prices, 2018 will still be a decent year,” said J.P. Gervais, chief agricultural economist at Farm Credit Canada.

The real question, he said, is what will happen in 2019.

The impact of corn and soybean price declines won’t affect much of the 2017 crop being marketed in 2018, and he said many farmers will hopefully have hedged about 25 per cent of their 2018 crop.

There may be a more difficult picture for the next six months on the livestock side, with supply from the U.S. coming north. These factors send signals that prices will be lower in the second half of the year.

“But I think overall, I think it’s a very good projection.”

He added that a key point farmers might take away from today’s interest rate decision is to revisit their business plans. They should make sure their marketing strategies still make sense and look at risk management measures and ways to hedge against higher rates.

Financial markets rate the likelihood of another interest rate hike this year at about 60 per cent, he said.

The immediate effect of today’s Bank of Canada announcement was muted because any investors had already factored in the rate hike.

— Terry Fries writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting. Click here to see CNS Canada’s twice-daily Canadian currency reports.

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The currency was the biggest driver, falling below 78 U.S. cents for the first time since July. The drop in the loonie was tied to the Bank of Canada’s decision not to raise interest rates and its accompanying statement, which took a bit of a softer stance on the possibility of future rate hikes.

As for soyoil, the gains there were tied to news that the U.S. was officially imposing anti-dumping duties on soyoil-based biodiesel from Argentina. Preliminary duties have already been in place since August, effectively shutting the South American fuel out of the U.S. and creating opportunities for domestic biodiesel producers.

Even with canola posting solid gains during the week, the combination of the sinking loonie and rising soyoil still saw crush margins improve by about $10 per tonne, to $84 above the January contract.

Daily volumes were large in the canola market during the week, as participants were busy rolling out of the nearby November contract and into January ahead of the expiry of the front month.

Off the board

However, the active canola market was mirrored once again by the complete lack of trade in the milling wheat, durum and barley futures. ICE Futures Canada finally announced it was pulling the plug on those long-dormant contracts during the week, taking them off the board on Oct. 26.

Introduced in response to the end of the Canadian Wheat Board’s single desk in 2012, the milling wheat and durum futures never really caught on. Barley futures had been around in one form or another for the past century, but volumes dropped off since the futures market went electronic in 2004, with the last actual open interest seen in 2016.

The chicken-and-egg argument as to why the grain futures never gained traction was that the markets needed liquidity in order to be viable, but nobody was willing to be the first to stick their neck out and provide that liquidity, because there was no real open interest — a vicious cycle of inaction.

The relatively smaller acreage seeded to durum and barley in Western Canada may be the simplest and least conspiracy-prone explanation for why those futures failed. Those two commodities act more like special crops in many ways, with relatively few players in the durum market and with much of the barley trade taking place directly between growers and feedlots.

However, milling wheat is a different case and the lack of a Canadian futures market is detrimental for farmers from a price discovery standpoint. Grain companies were already comfortable dealing with the Minneapolis spring wheat futures for their hedging needs, which meant a Canadian market always had an uphill battle in front of it. While it may be true that there’s only enough spring wheat grown in North America to support one futures contract, the fact that the contract is based in the U.S. can distort price signals from a Canadian perspective.

Post-single desk, the general practice for pricing hard red spring wheat in Western Canada has been to present a basis level relative to the Minneapolis futures. Due to the exchange rates, that basis often comes out as a positive number showing the difference between the U.S.-dollar futures and Canadian-dollar cash price. In a normal market, a positive basis is a sign that the buyer really wants the product. However, when accounting for exchange rates, the actual cash price often turns out to be below the futures.

The calculations to figure out the true market are not that hard, but the optics presented and the fudge-factor in calculating exchange rates create difficulties for the Canadian farmer that could have been at least somewhat rectified by a functioning domestic futures market.

The post U.S. biofuel trade fight benefits canola futures appeared first on Manitoba Co-operator.

“Art is science made clear.”

I’ll try to combine them both so you gain a better awareness and appreciation of the power of exchange-traded option strategies for farm risk management.

My Farming Big Data research study shows that the numbers support options as a proven marketing tool. We know that options are an ideal marketing tool for producers with three unique advantages compared to a delivery or forward contract:

• No production commitments or delivery risk;
• Not locking in prices: downside price protection you need and the upside revenue potential you want;
• Minimal capital needed and minimal futures contract margin requirements.

Since a picture is worth a thousand words, the chart is what a revenue payoff using options looks like: potential upside price, revenue protection against the downside all without committing your commodity for delivery.

The revenue payoffs of option-based strategies speak for themselves, but what are other real-world benefits of option hedging applications?

Let’s look at the current market to see why flexible option strategies are such a practical marketing tool for managing price uncertainty.

There are a lot of varying and conflicting factors that will affect your thinking and pricing decisions. Take canola for instance. Issues like strong crush demand, canola carry-out falling to the lowest level since 2013 and a weak loonie, down five per cent from the high this past winter, are all supportive of canola prices.

Some of the negatives include nearly 23 million seeded acres of canola, as well as large potential U.S. and South America soybean crops. Associated external price pressures include U.S. soybean futures down around 10 per cent from recent highs with palm oil prices 20 per cent lower since the beginning of the year.

And weather… always a mixed bag. For instance, while we’ve had a snowy and very wet spring in many parts of Alberta, just recently Accuweather was forecasting drought in central and northern Alberta.

All in all, a lot to analyze, research and think about.

Precision marketing

Just like precision ag is very data driven and field specific, farm marketing needs to be specific to each farm and commodity to address all the unique uncertainties for the crops you produce. Your marketing plan needs to be flexible enough to take into account current market price conditions, farm storage capacity and crop rotation, among other things.

There are many things you can do to fine-tune your marketing strategies to reduce risks but also give you the upside potential from rising prices. So don’t just sell off the combine or use delivery contracts.

As we saw in last month’s article, there are opportunities to separate your commodity and currency strategies when selling your grain or livestock.

You should differentiate between your basis and your future pricing decisions. Right now, new-crop canola futures are sitting above $500/ton but basis levels, according to www.PDQinfo.ca, are still in the negative $30 under range across the Prairies.

You can also look at what spreads between the various futures months are doing. Are there opportunities to store your grain and earn the carry? In some of the cereal markets like wheat and corn, the answer is yes. In oilseeds like canola and soybeans, since the futures forward curve is much flatter, the answer is no.

As for weather, options can help you manage that risk. If you don’t want to sign a delivery contract when yields are uncertain in a very dry or very wet year, option-based strategies provide you with a delivery-free alternative.

These all factor in to the specific hedging and risk management strategies you develop for each commodity. What is best in one market is not necessarily the best in another. Different markets require different strategies. For example:

• A straightforward put strategy for canola works well given current conditions;
• A delivery contract for wheat may be the best approach, if you have a good basis;
• An option spread strategy may make the most sense for soybeans;
• Cattle has moved up significantly recently and is very volatile so dictates a different approach than just a month ago; and
• For the time being, you may not want to do anything on the Canadian dollar as it drifts lower.

Bottom line, with constantly changing chart patterns, uncertain supply-and-demand figures and ever-present summer weather risk, we don’t know for sure where prices are headed. However, if you spend some more time on the art and science of marketing like you do on the theory and practice of growing your crop, you can reap bigger returns over the long term.

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The question we ask is, “Have you thought enough about the protection plan for your crops both sitting in the bins and to be harvested next year?”

That was then, this is now

While current prices aren’t nearly as high as they were in the fall/winter of 2012, it still does make sense to follow the process again this year to analyze next year’s futures prices for your grains:

Current soybean futures are about $13/bu. while next November is sitting near $11.50/bu., not a bad level given farm break-even and margin levels. November 2014 canola is at $520/tonne, close to today’s prices of $490-$500.

Minneapolis wheat futures are showing some decent levels at about $7.40/bu. all throughout 2014.

While a lot of things can and will happen between now and next year, there are many ways to put protection in place in case grain prices fall further. Consider the following strategies to help diversify your decisions across time, strategy and price:

• Time: Put on protection for a portion, initially 25 per cent, of your production without having to be too concerned about the final acres and bushels produced. As time goes on, increase this to 33 per cent, 50 per cent or 75 per cent.
• Price: Be a little more proactive adding protection if prices do go lower over time. However, maybe you get a really big rally and prices move back to the highs of the past year, be more aggressive up at those higher levels. Lock in your basis when you want knowing you at least have some part of the outright price risk taken care of.
• Strategy: Greater storage capability gives you some flexibility to sell your grain when you want. This is a big advantage, but along with this opportunity comes greater risk. If you store your grain without putting some protection in place, you are actually taking on more risk.

Diversification

All these ideas are about diversifying your grain marketing so you are not setting your prices all at the same time or at the same level.

While there are many futures and options strategies available, consider a straightforward put option purchase strategy to protect your downside and give you some peace of mind:

• Soybeans: With November 2014 at $11.60/bu., a new-crop option to protect an $11.20/bu. level costs about $0.50/bu. If you assume a basis of about $1, this still gives you a floor price of almost C$10/bu.
• Wheat: Establish a six-month floor price on wheat at today’s price level using options for approximately $0.40/bu.

In both these option scenarios, you have downside protection, but still have the opportunity to benefit if prices move higher.

Bottom line

Despite many ideas and strategies available, there is still hesitancy on the part of farmers towards hedging so I ask you this question:

“You buy insurance on equipment, buildings and tractors. Why not get a bit of protection on one of your biggest assets: your crops sitting in the fields and in the bins?”

There are many ways to protect against falling prices by managing your risk across time and many tools you can use. Don’t be afraid of all the hedging tools available — understand how to use them. This will let you focus on next year’s crop, not the next month’s prices.

Using all the tools in your tool box means using a combination of futures and options to determine how and when to put those strategies into play. This marketing approach gives you the flexibility to determine where, to whom and how much of your crop you will ultimately deliver, or store in your bins.

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What is risk?

For us, risk is not standard deviation, volatility or even losing some money. The definition of risk that most connects with clients is the consequence of not meeting your objectives. We like to work with clients to define internal benchmarks and levels that take into account their exposure, revenues, costs, break-even and even their worst-case scenario.

Risk, like energy, cannot be destroyed but it can be altered, redirected or transferred. Risk management is not about not losing any money, it’s about balancing risks and balancing gains and losses.

Risk management doesn’t just necessarily manage the risks of the markets; it manages the risk of the behaviour of the individuals who make up the markets. This gets into the realm of psychology, or the new fancy term “behavioural economics,” also known as human nature.

What is risk management?

We are all learning every day in the markets and we want clients to learn more about their money so they can earn more on their money. A risk-management strategy needs to start with learning and education. Once you are comfortable and confident with the basics, a proactive, disciplined, straightforward risk-management strategy can be developed.

•  Proactive: As Benjamin Franklin said: “By failing to prepare, you are preparing to fail.” We want to plan ahead while remaining flexible, ready to act and adjust strategies over time as markets develop and opportunities present themselves.
•  Disciplined: I find the best methods don’t attempt to guess where prices are going but rather consistently apply predefined risk-management techniques. The aim is not that it works perfectly every time, but rather consistently over time.
•  Straightforward: Simple, straightforward strategies provide the greatest results since you are more likely to use them. There’s no point building a more complex mousetrap if no one is going to use it.

Protecting the downside

A protective put option strategy is very straightforward. It’s just like buying price insurance on future production or grain sitting in the bin. It is simple but can be costly because of the premium you pay, but there can be good reasons for this type of approach when prices are high.

Here’s a recent example of a producer north of Winnipeg who wants to hedge his new-crop soybeans for October/November delivery. He is very profitable above $12/bushel so with November soybeans currently at $12.65, we decided to buy November $12.40 put options. In other words, he can sell a futures contract at $12.40 even if the market has dropped below that level. The options cost $0.60, which means he’s established a floor price of $11.80. The main benefits of this approach are downside protection with upside potential.

Three scenarios

From now until November, soybeans can move either up, down or sideways. Let’s look at each scenario:

•  Up: Soybeans reach $15 for Oct./Nov. Since that is above $12.40, the put options expire with no value, but the farmer can sell grain into the cash market at $15. He’s lost the put cost of $0.60, but still nets $14.40, less local basis.
•  Down: Soybeans drop to $10 for Oct./Nov. The options purchased at $0.60 are now worth $2.40 — the difference between the $12.40 put strike price and the current price of November soybeans at $10 — for a net gain of $1.80. The farmer sells into the cash market at $10, or a net price of $11.80 minus the basis.  
•  Sideways: Soybeans are at $12.65 for Oct./Nov. The $0.60 options expire with no value, but the farmer sells in the cash market at $12.65 for a net of $12.05 minus the basis.

Summary

This protective put strategy offers:

•  Downside protection below $11.80/bu. less basis. (Put strike price of $12.40 minus premium of $0.60 = $11.80.)
•  Upside potential above $11.80/bu. (Put strike price of $12.40 minus premium of $0.60 = $11.80.)

Overall, for the cost of the insurance premium to protect the downside, you can also participate in upside of higher prices.

The bottom line, like everything in the markets, is that you have to balance risk and reward. Some strategies cost very little so offer less protection and with little upside. Others are more expensive but give full protection and more upside.

It’s important to remember that this is just one of many strategies. You shouldn’t hedge everything with one strategy at one time. Instead give yourself some flexibility to diversify your hedges. While you won’t be right every time with your market direction or strategy, what is plausible is a consistent, disciplined approach year in, year out to help you manage your risks before they manage you.

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Calgary, Alberta-based Agrium, which has begun mailing its proxy circular to shareholders ahead of the meeting on April 9, said Jana’s plan is an “ill-conceived scheme” that will destroy shareholder value.

The activist U.S. hedge fund, which owns some 7.5 per cent of Agrium’s shares, has for months demanded a number of changes at the company, including a split between its wholesale fertilizer production arm and its retail business, which sells seeds, crop protection chemicals, fertilizers and other farm products.

Talks aimed at developing a truce between the two sides broke down in February and Jana has proposed five candidates for election to Agrium’s 13-member board.

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With corn prices down nearly 15 per cent since August and facing the possibility of an uninsured crop, farmer groups say they need a solution within three weeks to safeguard the April/May harvest.

“The crop has already been planted,” said Eduardo Palau, the head of CAADES, an agricultural producers’ association. “Now we have to protect it so we can get a good price for it.”

The government has frozen a $41-million fund pending a review of how it operated. But farmers liked the program, which provided government money so they could buy hedging contracts through private brokerages that are then traded on the Chicago exchange. Government picked up 85 per cent of the cost.

By funding the hedging, the government avoids having to shell out big crop subsidies when harvests fail.

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Early in the reporting period, the hot and dry weather which threatened soybean yields in the U.S. encouraged some significant price gains. However, in what was conceived as a bullish supply/demand report from the U.S. Department of Agriculture due to the government agency’s tightening of U.S. and world soybean stocks, the rally in Chicago and Winnipeg came to an abrupt halt.

A number of market participants were quick to point out that if futures can’t rally on bullish news, the top of the market may be in.

Indeed, canola values did run into some profit-taking, with the backing away by domestic crushers from the market also erasing some of the upward price movement. The gains in canola were further tempered as elevator company hedge selling increased substantially. Much of that selling was tied to the increase in farmer deliveries of canola into the cash pipeline, with producers hoping to take advantage of strong cash bids.

If it had not been for some late-week Chinese inquiries into the availability of Canadian canola and some revised weather outlooks in the U.S. calling for an upturn in the heat cycle, the three nearby canola futures may have been pushed lower.

Some decent two-way commercial trade was evident in the new barley contracts on the ICE Futures Canada platform this week, with values moving sharply higher. A lot of that had to do with the sharp jump in U.S. corn futures, but tight feed barley supplies in Western Canada further encouraged the upward price action.

Milling wheat and durum contracts also experienced gains, with ICE Futures Canada behind the upward price push in an effort to keep values in line with the price action in Minneapolis.

Corn futures led the price advances seen in Chicago during the latest week with tight old- and new-crop supplies stimulating the strength. The absence of precipitation has significantly reduced the yield potential of the crop and there is little hope that rains at this late date will be able to do anything to recover some of the loss.

USDA, in its supply/demand balance tables, released some very supportive numbers, with the estimates even coming in below pre-trade expectations.

USDA slashed its forecast for this year’s corn harvest, projecting that the crop is no longer likely to set a record because of a worsening drought in the Midwest. The department pared its estimate for this fall’s corn yield by a higher‑than‑expected 12 per cent from its forecast last month, to 146 bushels an acre from 166 bushels an acre. Analysts on average had expected a forecast of 154.1 bushels an acre.

The forecasts initially seemed to heighten worries that the corn crop could shrink enough to keep supplies strained late this year. But the USDA report wasn’t enough to sustain those higher prices, as traders said the agency’s corn estimates fell below expectations only because traders had expected USDA to take a more conservative stance.

“Even though the yield was under market expectations, we got exactly what we wanted,” a market participant commented.

Soy support

Soybean values in Chicago were also able to maintain enough upward mobility to push higher on the week. Good export demand reduced yield prospects because of the heat and dry conditions, and tight world supplies helped to generate the advances.

The taking of profits and the inability of futures to move up on the USDA report ended up trimming some of the upward movement in prices.

USDA cut its yield forecast for the U.S. soybean crop to 40.5 bushels per acre from 43.9 bushels per acre, due to the drought in the Midwest. Analysts on average had expected a smaller cut, to 42.3 bushels an acre.

Wheat futures on the Chicago, Minneapolis and Kansas City exchanges posted some significant advances during the week. Some definite spillover from the gains seen in corn were evident, but the adverse weather which has reduced the size of the wheat crop in the Black Sea region further bolstered prices. Concerns about heat stress in the U.S. spring wheat-producing areas in the northern-tier states also propelled values to higher ground.

Strength in wheat also reflected ideas that global importers will need to turn to the U.S. to cover needs, especially with wheat production in Australia and China also being threatened by poor weather conditions.

The USDA report, meanwhile, also reflected tighter-than-expected U.S. wheat stocks. USDA forecast domestic wheat inventories at the end of the 2012‑13 marketing year to be 664 million bushels, below analysts’ average expectation of 725 million. USDA pegged total U.S. wheat production this year at 2.22 billion bushels, slightly below expectations for 2.25 billion.

A lot of the market direction that will be dictated in Chicago and Winnipeg during the short term will continue to be weather related. The weather in the U.S. remains hot, with very little precipitation in the cards. The absence of rain is now coming during the critical stages of development for soybeans. Considering how tight old-crop soybean supplies are, and the demand outlook for new-crop soybean supply in the U.S., there is little room for the crop to be downgraded much.

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“It is this exemption that would allow (JP Morgan executive, Ina) Drew and her team to hedge the credit on the bank’s unusually large portfolio of corporate bonds by purchasing a “synthetic” derivatives instrument whose value would go up when a widely traded index of more than 120 blue chip corporate bonds went down — or vice versa. But it was also broad enough that it would make it possible for them to later hedge their original hedge and move aggressively to take the other side of the bet.”

See what I mean?

Three “hedges,” a “vice versa” and “a ‘synthetic’ derivatives instrument” and I’m a puddle of muddle. You want to take a guess?

What is quite clear, however, is that Morgan’s so-called hedge wasn’t a hedge that any farmer or rancher — here or anywhere — would recognize. Pure and simple, it was a naked bet, raw speculation, and hedges, by definition in any language, are exactly the opposite.

The Post article was one the few pieces of journalism to recognize this difference and to call this fat slab of pork a pig: “It all has very little to do with hedging and a lot to do with gambling.”

By pure coincidence, just as the Morgan Mess was again wobbling both the global financial markets and the knees of Washington regulators, the futures market — the place where actual hedges are placed — was again expanding its trading hours.

As of May 20, trading in the CME Groups’ key ag contracts moved to 21 hours per day.

The expanded hours, explains the CME, will give market “customers… greater access to the unparalleled liquidity, depth and product choice of CBOT,” the old Chicago Board of Trade, “Grain, oilseed and ethanol futures and options markets…”

It also will give farmers and ranchers unparalleled heartburn on days when key U.S. Department of Agriculture acreage, production, storage and livestock reports are released because markets impacted by the reports will be trading as the numbers are made known.

As such, the very markets that are meant to protect producers from being burned by volatility could become instant bonfires and the government will be bringing the gasoline.

Facing enormous risks on report days, country elevators, ethanol plants and other grain market participants are expected to either widen the basis, the gap, between futures and cash prices to limit market exposure or just stop buying grain until the market “trades” the report and establishes a more firm view of price.

Worse yet, none of this is about making markets more efficient or price discovery more transparent. Indeed, the hours of the Chicago ag markets were expanded as a competitive response to the threat of another commodity exchange.

So, less than four years and nearly $500 billion of taxpayer money to save the banking system from the bankers, six months after MF Global torched commodity markets, farmers and ranchers for $1.5 billion in an implosive bankruptcy and a month after Morgan admitted it fell into a black hole of its own making, commodity markets are now offering “unparalleled liquidity, depth and product choice.”

Gee, I wonder how that’s going to turn out.

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