The July/November canola spread narrowed $3.10/mt to close at an inverse of $4.50/mt Tuesday (July trading above the November), a positive sign of solid commercial demand or bullishness. This is the narrowest this spread has been since Oct. 2, after trading as wide as minus $18.10/mt (November trading over the July) on February 13.
There will be plenty of head scratching over this move, as market watchers struggle to question why the market is presenting bullish signals on a year with record production, disappointing rail shipping and expectations of a carryout growing from 588,000 mt in 2012/13 to an expectation of 3 mmt or more during the current crop year.
Some producers have suggested that stocks may be a great deal tighter than the 9 mmt estimated by Statistics Canada as of March 31. Some grain companies have been calling for contracted seed one to two months early, which begs the question why would they not simply buy in stocks to meet their current needs? Are producers that tough to deal with given current pricing, or is it simply not out there in the volumes suggested? Spot cash in the Vancouver trade is reported at $40/mt over the July as compared to the $80/mt over the nearby which traded at the end of March.
The July/Nov inversion through spring and into summer is not a rare occurrence. The attached chart indicates that the July has inverted over the November each year from 2009 to 2013. The most pronounced inversions were seen in 2013 (blue line on attached chart), when the spread narrowed to a weekly high of plus $85.50/mt, fell to plus $49.80/mt a month later while the July ended trade at a $72/mt inverse. The crop year ended with an extremely tight carryout of 588,000 mt as of July 31.
2012 saw a similar circumstance, with another tight carryout of 707,000 mt as of July 31, which resulted in the July/Nov spread ending at an inverse of $60/mt, as indicated by the red line on the attached chart. 2011, as shown by green line, ended the crop year with a carryout of 2.186 mmt, with the July/Nov spread ending at plus $15/mt.
In both 2009 and 2010, as shown by the pink and purple lines, the markets did invert throughout the spring and summer although the July finished at a modest carry of $1.10/mt in 2009 and $.20/mt in 2010.
The inverse is sending a signal to sell seed sooner than later given nearby demand. One other clear signal is basis. The average prairie-wide canola basis, based on available internet quotes, narrowed to $34.93/mt under the July. This would suggest an average cash bid of $462.27/mt or $10.48/bu based on Tuesday's close. The new-crop basis is calculated to have widened to $51.59/mt under the November since last Friday, which results in a cash bid of $441.11/mt or $10/bu.
The risk to producers holding old-crop is that if the stocks are as high as suggested by official estimates, the current trend of narrowing old-crop basis levels and the inverse over the July could be short lived when seeding ends and producers focus on moving old-crop prior to harvest.
One other factor to watch is visible stocks of canola. Visible stocks were reported at 876,100 mt for week 39, which is for the week ending May 4. This is the tightest visible stocks seen since the combined week 21 and week 22 data resulted in visible stocks in the system of 845,710. Historically, markets become increasingly nervous at levels below 1 mmt, which could act to support prices in the next few weeks.
Cliff Jamieson can be reached at email@example.com
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