Canada Markets

Weakening Jan/July Canola Carry Viewed as Bearish

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Nov. 14 canola close saw the January-to-July futures spread, or carry, widen to minus $20.50 per metric ton (black line against the secondary vertical axis), the weakest seen since the same date in the 2013-14 crop year, when ending stocks spiked to 3 million metric tons (brown bars measured against the primary vertical axis). (DTN graphic by Cliff Jamieson)

Dow Jones canola market commentary points to uncertainty surrounding canola production as a feature that has affected recent trade, although the market itself seems to show few concerns. On Wednesday, the January contract closed below support at $480 per metric ton (mt), and the July contract ended below $500/mt psychological support, both for the first time this calendar year. While both contracts recovered to trade above these levels on Thursday, they faced a combination of commercial and noncommercial pressure that resulted in prices settling below support once again.

The black line on the attached chart highlights the January-to-July spread, or carry, in the canola market, which closed at minus $20.50/mt on Wednesday (measured against the secondary vertical axis). The spread weakened further on Thursday to minus $21.30/mt (July trading above the January). Looking back over the past 10 years for this date, this is the weakest Jan/July spread reported since the same date in the 2013-14 crop year when it was reported at minus $21.20/mt. At that time, the November AAFC supply and demand tables indicated a jump in ending stocks for the crop year from 608,000 metric tons in 2012-13 to 1.4 million metric tons (mmt) in 2014. Just weeks later, Statistics Canada revised the crop size higher by 2 mmt, while ending stocks were increased to 3 mmt for the crop year.

While it is unlikely that this year's report will lead to such bearish news, the weakening spreads could be cause for concern. Viewed by DTN as being determined by the actions of commercial traders, this could signal that current production estimates are understated or demand is overstated and that stocks could be eventually revised higher.

AAFC's November 2018 supply and demand estimates were released on Thursday with canola estimates left unchanged.


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