Research / Farm Level Pricing and Risk Management of Canola in Western Canada

Farm Level Pricing and Risk Management of Canola in Western Canada

Researchers: James R. Unterschultz, University of Alberta; Tomas Nilsson, University of Alberta; Charles Pearson, Alberta Agriculture, Food and Rural Development; Derek G. Brewin, University of Manitoba; Jared G. Carlberg, University of Manitoba

Research Summary

Producers are concerned that canola is not being priced competitively at different buying points in Western Canada. The buyer and handling system in W. Canada has consolidated changing spatial price dynamics. Growers are concerned that buyers may be exerting long run market power in the canola market (i.e. pricing efficiency) and this is impacting local prices and local basis.

This two year project will measure the long-run market power in canola pricing, evaluate pricing in different locations, evaluate market based risk management pricing strategies and assess the policy implications of the findings for the canola industry. It will measure the ability of western Canadian farmers to use the canola and soybean market for risk management. Additional long-run benefits from the research will be associated with contracting and pricing of canola in emerging markets such as non-food usage and bioplastics/bioproducts.

The ten year average canola production (1995-2004) is 6.5, 2.2, 2.8 and 1.5 million tonnes for Canada, Alberta, Saskatchewan and Manitoba respectively (Canola Council of Canada). Small improvements in long-run pricing and risk management have annual multimillion dollar paybacks to canola growers in Western Canada. Research results will assist in policies to improve canola pricing and market risk management by producers and processors.

The research project will be a joint effort between the University of Manitoba and the University of Alberta. Two graduate students will be involved in this research. The request for funds from the FLP will be $20,000 in year 1 and $20,000 in year 2. Additional funding of $78,320 will be applied for from industry and provincial research funding agencies.

Significance of Research

The results from the research will have direct applicability into the risk management at the farm level, an FLP objective. Market based risk management is also a key component of the Agriculture Policy framework for Canada.

There have been no significant published academic studies on W. Canada canola market efficiency in the last 8-10 years. There have been major changes in the grain handling system, railway freight rates and the WCE canola futures contract. Initiatives are underway through the various canola associations/commissions/councils to study canola risk management.

The benefits will be:
-improved understanding of canola pricing.
-improved pricing of canola at the grower level in spot markets, futures markets and in contracts.
-improved grower and industry understanding of tools for managing price risk.
-improved industry understanding of how to use alternative markets to manage price risk in canola.
-lower market price risk for canola grower.
-analysis input for policies on risk management and pricing.

Summary of Research Results: Yet to come.