The challenge for the canola market is to determine how high prices need to go to ration tight global stocks. Aug. 17 saw the November reach a high of $940/metric ton, the highest trade seen since the $949/mt high reached on July 13, which happens to be the all-time high shown on the continuous active chart.
On both days, July 13 and Aug. 17, prices partially retraced their move higher to end the session near the middle of the session's trading range, with traders showing hesitation at the highs. One distinct difference between the two sessions is reported daily volume. On July 13, daily volume in the November contract was reported at 20,696 contracts, up 375% from the previous day and the third-highest volume achieved over the life of the contract. The $940/mt high reached on Aug. 17 was achieved on a much lower volume of 8,350 contracts, up only 6.2% from the previous day and down 2.9% from the previous five-day average.
On Aug. 17, the Canola Board Margin Index was reported at minus $1.05/mt, which acts as a proxy for the return, in this case a loss, generated crushing canola. The index is calculated using the November canola future along with the October soybean oil and meal contracts. A ProphetX chart approximating the move of this index shows a high of $188.80/mt reported as of June 10; the index points to a quick move from feast to famine.
Another signal of potential rationing is seen in today's Statistics Canada inflation data, with consumer prices for all goods up 3.7% year-over-year in July, above the 3.1% reported in June and above expectations. When one drills down into specific items, we see the year-over-year change in the price of cooking or salad oil (1 litre) is 15.4%, up sharply from the 6.4% year-over-year increase reported in June and the highest year-over-year change since March 2009. This year will test the elasticity of demand on the food side of the equation.
The rationing required is also faced in global markets. When converted to Australian dollars (1 CAD = 1.09 AUD) the ICE canola future is converted to $986.23/mt AUD on Aug. 18, while price has rallied above $1000/mt AUD in recent days, providing a windfall opportunity for that country's growers while passing on higher costs to buyers.
Perhaps the largest piece to this puzzle is how big of a crop we are rationing, with Canada at the centre of the radar. The seven-day forecast points to rain over most of the Prairies, which will prolong the uncertainty over the size of the crop.
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