Cash canola on the Prairies may be sending a warning signal that bears watching and may warrant action on old-crop supplies.
The November contract closed $6/metric ton higher in June, and has added a further $7.60/mt so far this month. This move is counter to the typical seasonal move in canola. While the seasonal tendency is just one of six factors viewed by DTN in setting market strategies, current text suggests the month of July "tends to feature lower price direction as new-crop production risk diminishes." The five-year seasonal chart shows canola reaching a seasonal low in late-August/early September.
On July 21, the nearby November contract ended $0.60/metric ton lower at $484.70/mt, failing at resistance of the contract's 67% retracement of the move from the January high to March low, calculated at $487.30/mt. Trade also failed near this level on July 22, for a third consecutive session, closing a further $1.10/mt lower.
The most concerning move is seen in pdqinfo.ca cash price data for the nine regions of the Prairies reported. On July 22, cash bids weakened from $1.36/mt in eastern Manitoba to $11.80/mt in northwest Saskatchewan, averaging a $5.99/mt drop overall. The three regions in Alberta fell by an average of $5.96/mt, the four regions of Saskatchewan fell by an average of $8.06/mt and the two regions of Manitoba fell by an average of $1.88/mt. Basis was reported to weaken by as much as $11.20/mt from one day to the next in northeast Saskatchewan.
This trend continued on July 22, where the November contract closed $1.10/mt lower while cash bids across the prairies weakened from $1.18/mt in western Manitoba to $3/mt in northwest Saskatchewan.
We know that prices are high relative to normal for this time of year. Another factor watched in DTN's Six-Factor approach to market analysis shows last week's close of $483.50/mt at the 97th percentile of the 5-year range for this week. This statistic could lead one to question how much upside is possible?
On July 20, all nine regions saw cash bids reported at crop year highs for 2019-20, ranging from $452.11/mt in western Manitoba to $472.92/mt in northern Alberta. The bid for the Peace Region was the highest since July of 2018, the northeast Saskatchewan bid was the highest reported since August 2018, while all other regions were reported at the highest levels seen since Feb. 2019.
The attached chart points to the sharp drop in price for northeast Saskatchewan, which faced the sharpest drop in price on July 21, while July 22 losses remain in addition to what is shown.
Looking at just one of the nine regions as reported by pdqinfo.ca, the northern Alberta region, basis has weakened in three of the past four years in the July/August period (2016 through 2019), while averaging $9.42/mt weaker over the two months over this period. The four-year average basis is seen at $29.49/mt under the November contract, as of the end of August for this region, which compares to the $18.62/mt under basis reported on July 22.
Risk of eroding futures combined with weakening basis cannot be over-looked.
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Cliff Jamieson can be reached at email@example.com
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