Managing Sunflower Price Risk
Wednesday, September 15, 2004
filed under: Marketing/Risk Management
A unique aspect of growing sunflower is the crop’s multiple market options. Grow for the confection market or for oil, where you have the option of growing for high oleic, mid-oleic (NuSun™) or traditional linoleic markets. Grow a hulling hybrid, or “huller,” and you have the options of selling into confection kernel market, for birdseed, or for oil crushing. Now what other crop enables those kind of market choices?
Even in selling straight to the oil crushing market, there are choices:
• Take the cash price offered by elevators and crushing plants.
• Sell prior to harvest with a cash forward contract. The contract can be used to sell for delivery after harvest at a time when sunflowers are needed by the processor, generally at a premium price. For a discounted price, the contract might include an “act of God” clause to protect growers from production failures beyond their control.
It’s ironic, however, that for a crop with multiple market choices, there is no medium for futures pricing, since a sunflower futures market does not exist. Growers who would want to use futures strategies to protect against falling sunflower prices or take advantage of a rise in price would need to use the futures market of a different commodity. This is called cross hedging, since you’re hedging one crop in the futures market of another crop.
Chicago soybean oil futures and Winnipeg canola futures are referred to most often by market advisors for cross-hedging sunflower. But which futures market correlates to sunflower best? George Flaskerud, extension crops economist at North Dakota State University, conducted an analysis recently to answer that, comparing data for cash prices at the Enderlin crushing plant with Chicago soybean oil futures and Winnipeg canola futures from 1997 to April 2004.
NuSun prices during that period averaged 93% of the nearby futures price for canola (range of 79-115%), and 49% of the nearby futures price for soybean oil (38-67% range).
His analysis indicated that changes in NuSun prices correlated most closely with canola futures, and that soybean oil futures were a distant, second-best correlation. However, cross-hedges in soybean oil were generally more profitable than in canola, and aren’t subject to exchange rate variability, although month-to-month changes in the exchange rate are minimal.
In his analysis, Flaskerud also evaluated the profitability of different strategies in marketing sunflower, such as preharvest sales, storage for crop not forward contracted, storage cross-hedges, and selling cash sunflowers at harvest and replacing the sold crop with a long futures position.
No one strategy dominated; storage provided the highest average net price, although the most profitable storage period was unpredictable. Neither the use of canola futures or soybean oil futures offered a significant advantage over other marketing strategies. Soybean oil futures performed somewhat better across all strategies than canola futures in achieving a higher net price, but also had the most variability and greatest net price range.
Thus, both cross-hedges with canola and soybean oil futures have their advantages and disadvantages; Flaskerud suggests current fundamental and technical features in both markets need to be evaluated when considering a futures position with a particular sunflower marketing strategy.
More detailed information can be found in a new marketing publication compiled by Flaskerud, “Managing Sunflower Price Risk,” (bulletin EC-1270). See the link “publications” on Flaskerud’s web site http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm or contact Flaskerud for more information, email@example.com, ph 701-231-7377. – Tracy Sayler