Canada Know-Risk Market Outlook | Managing Risk vs Maximizing Opportunity

By: Craig Turner, Senior Risk Management Consultant

Tue, 13 Dec 2022, 13:35

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Canada Know-Risk Market Outlook

Craig Turner

Office: 312-706-7610

Email: Craig.Turner@StoneX.Com

Twitter: @Turners_Take

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Canola up 9, soybeans up 8, corn up 2, HRS up 9, HRW up 10, SRW up 8.

GRAINS & OILSEEDS | Argentina weather and Russian aggression is supporting the grain and oilseed markets today. Drought persists in Argentina and subsoil moisture is short. The forecast is hot and dry for the next 10 days. If conditions don't improve by the end of the month, then yield loss is a real concern for Arg corn and soybeans. La Nina is fading but will it be too late for Argentina by the time the weather pattern finally changes? For now weather premium is added to S. American spring planted row crops.

Russia is escalating their attacks on Ukraine as we head into winter. Over the weekend Russia attacked energy plants in the port city of Odessa. They did not directly attack the shipping facilities but you can't run a port without power. Wheat was nearing fundamental and chart support late last week and the fighting is forcing the shorts to cover.

Oilseeds are rallying towards resistance levels again. That includes $840 for new crop canola, $900 for old crop canola, $14 for new crop soybeans, and $15 for old crop soybeans.

MANAGING RISK VS MAXIMIZING OPPORTUNITY - There is always the struggle between fear and greed when anyone is involved in the financial markets. Each individual producer needs to determine if they want to focus more on Managing Risk or Maximizing Opportunity. Examples of both are below. The point of these hedge examples is to show how we can use options to build floors or set targets. IMO - I like the Managing Risk strategies for new crop and the Maximizing Opportunity strategies for old crop.

MANAGING RISK | For producers who do not want to make any more forward sales, another option is buying the Nov 2023 $800 put for $60 or less. That will give you a floor at $740. If that is too rich we can sell a $1000 Nov Call for $25 and bring the net spend to $35. This gives you a floor from $765 ($800-$35) but caps you at $1000. There is margin involved when you sell a call so please speak to your advisor about the risk and capital requirements before putting on this hedge.

If you don't want to cap your upside, there is another solution, but it leaves your downside unlimited. See example Hedge idea #2

November 2023 Canola

MAXIMIZING OPPORTUNITY | If your major concern is missing out on high prices or not having a crop (due to drought), then courage calls are a good strategy. The rub is you don't have downside protection. The idea is we buy out of the money calls now so they are in place when you make forward sales later in the marketing year. When you make the physical sale you still have a call in place if the market goes higher. If there is a drought again you have a financial product in your hedge account that benefits from a smaller crop. If this is a better fit for your needs I would buy a call for your target price. The Nov 2023 $900 call is $46, the $950 is $34, and the $1000 is $25. You pick your strike, buy the call, and when the market gets up their you sell your grain. The risk is premium paid for the option and we may never get to your target price while having no downside protection.

You can use this same strategy for old crop too. If you have canola in storage and plan on selling by the end of April, you could buy a $900 call for less than $30, sell on the next rallying into the high $800s, and still have the call in case the market goes higher.

Grains & Oilseeds

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