The canola market - sell, replace or hold

With canola prices at historically high levels, there are several marketing alternatives to consider.

‘Other than sales commitments already in place, one question producers have is what to do with that remaining canola inventory,’ says Neil Blue, provincial crops market analyst with Alberta Agriculture and Forestry. ‘Should it be sold to take advantage of these record high harvest-time prices? Should it be sold and replaced on paper to track a potentially higher price? Should it be stored to await possibly even higher prices, while taking the precautions to ensure safe storage?’

An important first step in marketing is to know your product. Submit representative canola samples for grading to several buyers and the Canadian Grain Commission through its Harvest Sample Program. Blue notes that some buyers are paying premiums on oil content above a threshold level.

One consideration is the need for cash flow to pay outstanding and upcoming expenses. An alternative to selling canola for cash flow needs is to use the Advance Payments Program to borrow against crop inventory at a 0 or low interest rate.

‘Most basis levels, the difference between the cash and futures markets, are also seasonally attractive, particularly so after the harvest-selling period. These strong basis levels imply that, despite the high canola seed prices and weaker calculated crush margins, demand remains strong for the weather-reduced amount of canola produced. A basis contract will lock in that attractive basis component of price while enabling a target to be set on the futures price component.’

An alternative after pricing canola is to replace some or all of that volume with paper positions by buying deferred futures positions or by buying call options. The canola futures market is in an inverse position, where nearby futures prices are higher than deferred prices. That inverse position signals that the market demand is for canola seed sooner rather than later.

‘On the other hand, U.S. soybean oil and soymeal futures, which relate to canola prices, are in a flat or slight carrying charge situation where nearby futures are similar to or discounted to deferred futures. If one believes that canola demand and prices will remain strong throughout the crop year, with the futures market in an inverse, buying deferred futures or call option contracts to replace part of canola sold is a valid strategy,’ says Blue.

Storing the canola may also be a good decision. Most canola was harvested in dry condition, but one must pay attention to the condition of stored canola. Any spoilage of stored canola would be a shame with prices so high.

‘Again, basis levels are stronger for the deferred contracting periods and one may consider locking that basis while waiting for a higher futures price. However, with the futures market discounted for the deferred months, the futures market may need to improve from current levels to offset that inverse futures price.’

The bottom line, says Blue, is that there are several marketing alternatives to consider for canola. ‘Often, compromise is a good strategy, that is price some, store some, and possibly replace some on paper by using a brokerage account. Remember that nobody knows for sure what the market will do. Hopefully, the high price makes for an enjoyable and profitable marketing experience.’