Canada Markets

Despite the bullish fundamentals hanging over the canola market, January canola futures closed at $591.30 per metric tonne today, down from September's high of $657.50/mt. At first glance, a lump of coal has been delivered for Christmas with prices struggling under the weight of such negative factors as Chinese cancellations of U.S. soybean purchases and the looming South American soybean crop, which is forecast to be a record crop in size. Meanwhile, canola exports from Canada are lagging last year, while the domestic crush is far ahead of past years on increased capacity.

If this is a bearish situation, someone forgot to tell the commercial users and exporters. Futures spreads can provide valuable insight into the activity of the commercial users and is in fact utilized by DTN analysis and viewed as an indicator of the market's fundamentals.

January canola futures continue to trade sideways, within the range of the November trade. The January future closed the month of November at $594.30/mt, while closing today at $591.30, just $3/mt or a loss of .5%.

What has changed during the month is the futures spreads or the strength of the futures inverse (nearby future trading higher than the distant future) as we look out over old-crop futures. As we can see on the attached chart, the weekly Jan/Mar spread (blue line) has been trending higher since the week of June 4. After reaching a more recent low of $.20/mt for the week of Nov. 26, this spread has strengthened to today's $5.70/mt, a narrowing of the spread (or strengthening of the inverse) of $5.50/mt in one month.

While soybean spreads are weakening slightly in the forward Mar/May and May/July spreads, largely due to the potential record crop from South America which will flood the market in this period, canola spreads are perhaps reacting more to the concerns of tight canola stocks than they are to competing oilseeds. The Mar/May spread (red line) has strengthened $3.50/mt since the week of Dec. 10 to $4.40/mt today, while the May/July (green line) has strengthened $1.40/mt in the past week to $3.40/mt.

2011/12 was also a tight year for canola, although the year ended with a carryout of 728,000 mt, more than double the forecast 350,000 mt that has been estimated for the 2012/13 crop year. The Mar/May spread (not shown) reached a 2012 low of minus $6.90/mt on the week of Jan 23, moving to an inverse high of $13/mt the week of Mar 5 before settling at $11/mt when the March future ceased to trade. The May/July spread increased from a low or a carry of minus $3.40/mt the week of Jan 30 2012 to a high or maximum inverse of $8.50/mt on April 23 before closing at a $5/mt inverse when the May ceased to trade.

Implications are many. If last year's tight stock situation is any indication, the current inverse will increase. It may be interesting to watch this develop. Some time ago, an online chat site discussed the opportunity (and associated risk) of attractive basis levels offered by grain companies and crushers against the July future. One will need to carefully weigh the basis opportunity with the fact that earlier contracts could continue to build their premium over the July future.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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