While not shown on today's graphic, one chart that does jump out when looking at canola is the January/July spread chart, or the plot of the daily difference between these two trading months. On Aug. 21, this spread closed at minus $8.10/metric ton, with the July trading above the November contract. This spread weakened $1/mt on Friday and a further $1.10/mt on Monday to finish at minus $23.80/mt. This spread represents approximately 70% of full carry and can be viewed as a bearish view of market fundamentals from the standpoint of the commercial trade.
The front-end represents an even more bearish spread, with the January/March spread closing at minus $8.60/mt, which represents roughly 77% of full carry. With both crush and exports lagging the year-ago pace, market signals are sending a signal to store canola for sale in later months, which also allows for time for basis improvement.
The upward slope on the forward curves on the attached graphic, which simply joins the daily close for consecutive contracts for any specific day, and shows a steepening curve seen over time. The top or gold line the curve based on Aug. 1 data while the lower purple line represents the curve based on the Nov. 26 close.
The current January-through-July spread of minus $23.80/mt, which forms the upward-sloping line of the Nov. 26 forward curve (shown in purple), is closing in on the minus $25.20/mt spread calculated between the November contract and July contract as reported on Nov. 1 (green line), which involved storing grain for two additional months.
This may put into perspective what lies ahead in the final production numbers to be released on Dec. 6. While both crush and exports are behind last year's pace, they remain close and current government projections are pointing to demand to exceed last crop year. At the same time, commercial traders continue to reflect a bearish take on the market's fundamentals.
This fall, Statistics Canada released a study indicating that the average percent change in production estimates from the September estimate to the final November estimate over the past 10 years is 10.6%. The difference ranged from 20.5% in 2015, November estimate over the September estimate, to minus 0.4% in 2012, with the November estimate slightly lower than the September estimate. This was the only year of the 10 years studied where the final estimate in November fell short of the earlier September estimate. The odds of a larger production estimate, and perhaps the current spreads, could be pointing to a bearish report.
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