Canada Markets

My very first written piece for DTN almost a year ago was titled Growers Play Russian Roulette with Old-Crop Canola. The blog focused on the fact that canola futures were trading in a consolidation pattern, exporters had begun to slow in their pursuit of old crop stocks, the trade had already dialed in a tight carryout of below a half-million tonnes and the market inverse was screaming at sellers to take advantage of the superior prices at the time.

The inverted market as discussed is simply a situation where the nearby future is trading above subsequent contracts. This is a signal of tight stocks and high demand, as commercial users want product sooner rather than later, and will pay more to obtain it. On June 14 last year when the article was released, the July/Nov spread closed at $41.70 per metric tonne (July trading over the November by $41.70. Over the last half of June, this spread continued to gain until June 28 when a high of $54.60/mt was reached, only to plunge by $21.20/mt on June 29. Anyone pricing basis against the July in the last few days of the month may have faced extreme volatility in this spread.

While the five-year seasonal trend for canola indicates potential gains for the next three weeks, the July future seems to be hitting a brick wall in the $646 to $650.80/mt range. Meanwhile, both cash basis and the July/November spread have shown weakness. Cash basis has weakened from a high of $20.51/mt over the July in mid-April, according to my own Prairie-wide average cash basis, to $8.13/mt over the July today, a difference of $12.38/mt or $.28 cents/bu. As well, the July's premium over the November has rapidly deteriorated from its high on May 21 of $94.70/mt to today's $68/mt (July over the November by $68/mt).

While the open interest remains respectively high in the July contract at 53,745 contracts, many firms have rolled their positions to the November and are quoting basis levels in the neighborhoods of $60 to $110 over the November, which leads to less potential activity in the July and reduces the chance of a squeeze in the July which could potentially force futures higher.

The issue of an inverted market is not only seen in canola at present. While the Winnipeg ICE barley future is not trading, prices are adjusted on a regular basis to match market prices so they can be viewed as a proxy for old-crop/new crop spreads. Today the spread from old-crop to new crop is $45/mt. In reality, this spread may even be higher, with Lethbridge barley trading in the vicinity of $298/mt while new-crop bids remain closer to $230/mt.

Just one more example is that of yellow peas. Old-crop bids are suggested to be in the $8.75 to $9.25/bu. range, while new crop bids may be closer to $8/bu.

All three of these commodities are examples of the market sending the signal that the time to sell may be near. Expect volatility in spreads and basis as old-crop supplies dwindle, but do prepare for the possibility of an undesirable outcome while holding grain stocks through this inverse. There's an old grain trader's saying that suggests you never hold grain through an inverse. As stated on a Kansas State University presentation titled Estimating Profits from Grain Storage, in the case of an inverted market where your grain is wanted today and not in the future, "generally the best strategy is to do what the market wants you to do."

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

(AG)

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