Canada Markets

Cash Canola Sales Face A September Double Whammy

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Cash canola basis levels began to weaken rapidly in mid-July with expectations of new crop around the corner. While the pace of basis erosion has perhaps slowed, the average basis level across the Prairies was calculated at $22.26/mt under the November future and will undoubtedly continue to weaken as we move further into harvest. (DTN graphic by Nick Scalise)

There's no mystery behind many of the seasonal tendencies faced in the grain markets, especially when it comes to the depressed prices faced as a result of harvest pressure. This year will perhaps be no exception, with a possible record canola crop, which also has to compete for system capacity with other potentially large grain crops.

Canola's five-year seasonal index chart would indicate that the front-month future, in this case the November contract, has fallen roughly 5% from the last week in August to the last week in September on average over the past five years. Using this logic, a move to the $500 per metric tonne level could be in order. This may or may not happen, as the precarious state of the soybean crop in the U.S. will play a significant role in determining the direction of the canola trade. The good news is that the September low seen on the seasonal chart is the low-point for the index for the entire year, where price reflects roughly 95% of the seasonal average.

The weakening cash basis, as seen on the attached chart, most recently calculated at $22.26/mt under the November, which is an average of bids obtained across the prairies, is yet another consequence of selling physical stocks in periods of weak demand. This is the grain companies' way to control the flow of product into their facilities. In the case of harvest deliveries when space and rail service may be limited, basis may be utilized to completely turn off the tap in terms of deliveries.

The cash basis on the Prairies began to widen rapidly in mid-July when basis was averaging approximately $55/mt over the November to its current level of $22 under the November, roughly a $77/mt or $1.75/bu swing. This basis could easily continue to widen into the $30 to $35 under range.

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