Canada Markets

Canola Spreads May Confirm Optimistic Production Estimates

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The November weekly canola chart shows a long-term uptrend broken in last week's trade. The middle study shows weekly stochastic indicators trending lower, while the third study indicates weakness in futures spreads, which indicates bearish commercial sentiments.

The November weekly canola chart is showing bearish activity as of late. On July 12, prices moved lower and closed below trendline support which has been in place since December 2011, as shown by the upward-sloping blue line. Prices have lifted off of their recent low of $522.70 per metric tonne, which was reached in July 15 intra-day trade, with today's close at $526.10/mt. Today's trade is supported by old-crop soybean futures, which are rallying due to extremely tight old-crop supplies.

The middle study on the attached chart show the weekly stochastic indicators, which clearly indicate a trend lower into over-sold territory, which is represented by the horizontal red line at 20.

Without going into the mathematical background for these indicators, the theory behind the stochastic oscillator is that prices tend to close near the upper end of the trading range in uptrends, while closing closer to the lower end of the trading range in downtrends. Changes in price trends are observed when prices cluster around the lows for a given range in an uptrend, while clustering around the highs of a given range in a downtrend and buy or sell signals are observed when the two lines cross. The most reliable signals are seen when prices cross in the oversold region (below 20) for a change to an uptrend, while a change to a downtrend while in the over-bought region of the chart (above 80) is viewed as the most reliable sell signal.

Of interest is the third study, which represents the futures spreads. The Nov/Jan spread (black line) has fallen to a carry of $6.00/mt (Jan above the Nov) after a 2013 high of $4.20/mt, or $4.20/mt inverse. The Jan/Mar spread (green line) closed at minus $5/mt (March above the Jan) after reaching a 2013 high of $6.90/mt, or a $6.90/mt inverse. The March/May spread (purple line) closed at a $1.00/mt spread (March above the May), which remains bullish, although this spread has fallen from an $8.20/mt inverse in May and will likely move lower into a carry spread.

Taken together, these spreads indicate the activity or the sentiments of the commercial traders who are the closest in touch with the actual development of the crop. This group is viewed as bearish as evidenced by the spreads, and are selling accordingly. Recent media reports which include the possibilities of a record 15 mmt production estimate currently coincide with the activity of the commercials, suggesting they believe it's a big one.

Additional observations in today's trade would include Oil World's forecast for an 18% increase in global oilseed stocks by the end of 2013/14 from the 2012/13 stocks, in addition to the fact that while soybeans posted significant gains in both old-crop and new-crop trade today, soybean oil futures closed mostly lower. This is a negative signal for the canola trade, given the higher oil content in canola.

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Cliff Jamieson can be reached at



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