Market Advisor: Seasonal Average Canola Price to Remain Weak

by George Flaskerud, Crops Economist
NDSU Extension Service

The canola price in Canada is expected to remain about the same, on average, for the 2001-2002 marketing year as for 2000-2001, according to a forecast Jan. 10 by Agriculture and Agri-Food Canada. That forecast implies little change in the North Dakota average price from this marketing year to the next. The marketing year in North Dakota ends July 31, the same as in Canada.

Harvested acres in Canada are forecast to decrease 7 percent in 2001. The decrease is expected to result in a considerable draw-down of stocks. Ending stocks on July 31, 2002, are forecast at 900 thousand metric tons, 47 percent less than at the end of the current marketing year. Ending stocks on July 31, 2002, are forecast to be only 12 percent of total use.

The message here is that spring price rallies should be used to establish price protection on the 2001 crop. The low stocks-use ratio of 12 percent suggests that, while prices may remain low on average, they are likely to be volatile. The month of May is a traditional peak in November canola futures on the Winnipeg Commodity Exchange (WCE).

How should that price protection be established? It can be done by contracting, hedging and put options. Contracting or hedging may be the most profitable strategy if prices fall into harvest as expected. Put options have to be purchased, which could make them less profitable if prices fall. If prices rise, however, put options would shine. Because they establish only a price floor, the canola crop could be sold for the higher price.

Put options may be the most appropriate tool this year for preharvest marketing strategies because of the tight level of ending stocks forecast. Unfavorable growing conditions could lead to higher-than-expected prices.

Put options for canola can be purchased on the WCE. Consider using the November contract since it has had a greater volume of trading historically than the September contract.

On May 19, 2000, a November at-the-money put option would have cost 48 cents per hundredweight. On Aug. 18, that option could have been sold for $1.04, a gain of 56 cents.

Additional information on put options and other marketing strategies for canola can be found in Extension Bulletin EB-75, Price Risk Management for Canola producers in the northern Great Plains. The publication is available from your local office of the NDSU Extension Service.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu