Don’t get whacked by market swings, says broker

On the price side, there are lots of opportunities right now — but you need 
a plan to take advantage of them

If you don't have a plan, you may be at the mercy of "brutal" swings in commodity markets, Errol Anderson says.
Reading Time: 3 minutes

Good news for grain growers: Commodity markets have turned up — and the recovery of crude oil prices deserves the thanks.

“With crude now moving up to $50 a barrel, it looks like it could potentially go even higher yet into the fall market as demand is starting to exceed supply on the global side,” said Errol Anderson, president of ProMarket Communications in Calgary.

“That’s had a ripple effect right across the world, including affecting our grain markets.”

Fund managers have identified commodity markets as “where they’re going to put their money” and that flow of funds will support prices, he said.

“From the price side, these are excellent opportunities,” said Anderson before adding a caveat: “But at some point this summer, the fund money will tend to pull out. If crude starts to go down, all of a sudden, grains will drop, and it will drop fairly hard at that time.”

So right now is a good time for growers to start looking forward for their pricing.

“July’s hot weather will spark rallies and it will spark opportunities for pricing grain off the combine or into the Christmas market,” he said.

“We’ve got some canola growers here who are pricing canola more than a year forward now because of this. Prices are quite profitable. Growers are getting $11 a bushel or more for canola. They can make good money on that.”

Loonie heading higher?

The only ‘but’ right now is the mild recession that the U.S. is entering — even though the U.S. central banker says otherwise.

“The Federal Reserve says the U.S. economy is in recovery. That’s where we differ,” said Anderson. “The business side of the U.S. has entered a recession. I think it will likely work its way through the remainder of 2016 and go into 2017.

“The question now for the American economy is how severe it will become.”

If the recession worsens into 2017, that will become an issue for producers here.

“If the recession in the U.S. deepens, then the U.S. dollar is vulnerable to a drop, and other currencies will gain steam, including the Canadian dollar,” he said.

“A Canadian dollar surging above 80 cents is not great news for the cattle market or the grain market in Canada.”

Because of that, Anderson is “mildly bullish” on the Canadian dollar.

“It wouldn’t surprise me to see the loonie between 80 and 85 cents into the end of this year.”

Got a plan?

Producers need to figure out how to protect themselves from these market swings.

“Farm business 101 is that you’ve got to have a plan,” said Anderson. “If you don’t have a plan, you’re at the mercy of the swings in the commodity market, which are pretty brutal. They go straight up and then straight down.”

For Anderson, farm plans begin with cash contracts with local buyers “providing that basis levels are OK.”

“If you need cash flow off the combine to meet fall cash flow needs, you should be prepared to sign a deferred delivery contract at a profitable level as you see them, up to your comfort level production-wise,” he said.

“You don’t want to overcommit in case the unforeseen comes along that knocks your production down.”

And once you reach the point where you don’t want to commit to any more production to a deferred delivery contract, consider put options, he said. Those give producers the opportunity — but not the obligation — to sell their crop at a certain price or before a certain date.

“What put options do is guard the downside,” he said. “Right now, we’re purchasing in the current market November put options for about $20 a tonne. It gives the grower about an $11.35-per-bushel floor, minus their fall-delivered basis, and they have no obligation to any buyer.

“If these options expire worthless next fall, that is terrific news, because that means the cash market has gone higher. If the market does drop, these puts increase in value and guard the grower.”

But producers still need to keep an eye on basis levels, he added.

“If the basis levels are really attractive and you feel comfortable with your production, cash contracts are the way to go,” said Anderson. “But if the basis levels are weak and you’re uncertain about your production, that’s where your commodity trading account comes in.

“Producers need a plan, but the plan is a combination of cash contracts and a commodity trading account. It’s a blend.”

About the author

Reporter

Jennifer Blair

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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