Canada Markets

For the first time since May 1, the 2015/16 canola futures spreads, which includes the November/January, the January/March, the March/May and the May/July spreads all closed in negative territory on the chart. In other words, there is carry in the market between each successive futures contract, or each contract is trading higher than the one that precedes it.

To show the extent of this move, the Nov/July spread (not shown) reached a high of an $18.50/mt inverse on June 22 (November trading higher than the July 2016), while today this spread widened $2.60/mt to close at minus $10/mt or a $10 carry, with the July trading higher than the November. This is a considerable shift from a bullish market, or one whose market signals promote earlier sales, to a less bullish or increasingly bearish market, as determined by the spreads which represent the activity of commercial traders.

Despite the tighter fundamentals forecast for the crop, with recent Statistics Canada production estimates pegging the crop at 13.3 million metric tons, which is 14.2% drop from the 15.56 mmt crop produced in 2014, combined with ending stocks which could be reported below 1 mmt in Statistics Canada's Sept. 3 report, spill-over weakness from the much larger soybean market has led to a major shift in the market's view of fundamentals. Also contributing to this shift in sentiment has been the late-summer rains which have greatly boosted the prospects for the crop.

At a carry of $5/metric ton, the spread between the November and January futures represents close to 45% of full commercial carry as calculated by Prophet X. This can be viewed as a neutral market given DTN philosophy that a market whose carry is calculated below 33% of full carry can be viewed as somewhat bullish, while a market whose carry is calculated to be greater than 67% of full carry should be viewed as a bearish market.

At nearly 42% of full carry, the Jan/Mar spread can also be viewed as neutral, while the Mar/May and May/July spreads continue to reflect a bullish market with today's close reflecting a modest carry of $.30/mt and $.20/mt, respectively.

So far, both exporters and crushers seem content to ration tighter supplies. AAFC's most recent estimates would indicate 2015/16 crush to total 7.2 mmt, unchanged from 2014/15 despite added crush capacity on the Prairies, although four weeks of data from COPA show the year-to-date volumes crushed over 65,000 mt behind the pace needed to reach the annual target. As well, exports are estimated to total 7.6 mmt, down 17.4% from the estimated 9.2 mmt for 2014/15, while data for the first three weeks of the crop year show the cumulative volume only slightly ahead of the pace needed to meet the crop year target.

The attached chart shows the forward curve (series of futures closes for a particular point in time) for canola turning bearish, given the upward-sloping pink line which reflects today's closing prices. This is in contrast to the bullish, downward-sloping (inverted markets) curves plotted for June 1, July 1 and August 1.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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