NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
September 7, 2000
George Flaskerud, Extension Crops Economist
Canola ending stocks in Canada are expected to decrease somewhat from this past year but remain high, according to an Agriculture and Agi-Food Canada report released Aug. 28. Ending stocks are expected to be 23.6 percent of total use for the 2000-2001 marketing year ending July 31, 2001 versus 28.2 percent for 1999-2000, 8.4 percent for 1998-1999 and 5.39 percent for 1997-98. Canada is the third largest producer of canola/rapeseed in the world and the largest exporter.
Average annual marketing year prices at Velva, N. D., were $12.47 for 1997-1998, $10.35 for 1998-1999, and $8.20 for 1999-2000. The monthly average ranges were $11.50 to $13.24 for 1997-1998, $8.53-$11.52 for 1998-1999, and $7.50-$8.71 for 1999-2000. The price at Velva was $6.62 on Sept. 1.
Given this history for canola, have canola prices seen their lows? Should some canola be sold now? Should sales be spread out? Will it pay to store canola? Should a storage hedge be initiated?
An indication of price direction is the futures market for canola. Futures prices would suggest that we have seen the lows. On Sept. 5, Canola futures on the Winnipeg Commodity Exchange in U.S. dollars per hundredweight stood at $7.96 September, $8.13 November, $8.31 January, $8.48 March, $8.64 May and $8.77 July. The Canadian price per tonne multiplied by the exchange rate (.68) and divided by 22.046 gives the U.S. price per hundredweight.
The Velva basis for canola, relative to nearby canola futures, is near last year’s monthly average low of a minus $1.41. Although the low occurred in October last year, the low could occur earlier this year for a couple of reasons. The U.S. soybean crop appears to be shrinking instead of getting larger, and the basis is already near last year’s lows.
The basis improved considerably last year as the marketing year progressed. The monthly average reached a minus 23 cents in March. The basis improved by $1.18 per hundredweight between October and March.
Storing to capture potentially higher prices involves a cost. The cost of storing canola on the farm in good quality facilities would be about 68 cents from August until March. This cost was based on an in/out charge of 20 cents per hundredweight plus an interest charge per month. An annual interest rate of 11 percent was used.
Storage may be profitable according to these numbers. Combining the futures prices on Sept. 5 with last year’s basis, and anticipated storage costs indicates that storage until March provides the highest return to storage. According to these numbers, the expected net price (price after storage costs), would be $7.73 per hundredweight by storing on the farm until March. For this to materialize, the $8.64 May futures price and last year’s minus 23 cent basis would have to be achieved in March.
Storage was profitable during 1994, 1995 and 1998. During those years using Velva prices, 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 cents, on average. November, December and May were the best times to sell.
There is risk. Since 1994, the sale of canola in August was more profitable than storage during 1996, 1997 and 1999.
Some of the storage risk could be removed by establishing a storage hedge. For a storage hedge, the May futures would be sold now and offset in March. That leaves basis as the remaining risk, a much smaller total risk.
Spreading sales would also help reduce risk. Canola prices improved during late August into early September. So, some harvest sales at the improved price would be warranted. Additional sales in November and December would make sense since seasonal highs have occurred during those months at Velva during two of the last six years. March stands out in the analysis as the best time to make sales but delaying some sales until May could be profitable if the basis strengthens beyond March such as during 1998 and 1999.
Cash sales now and a storage hedge would yield a price combined with the Loan Deficiency Payment (LDP) that is above the loan rate. The LDP for canola in Ward County on Sept. 5 was $3.69. Adding the LDP to the cash price of $6.62 gives a combined price of $10.31 which exceeds the loan price of $9.80 in Ward County.
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Source: George Flaskerud, (701) 231-7377
Editor: Tom Jirik, (701) 231-9629