The January/March canola spread on the ICE Canada Exchange is sending anything but a bullish signal. This spread closed at minus $8/metric ton on Tuesday, which represents a bearish level when compared to full carry between the January and March contracts, while reflecting the actions of commercial traders in advance of the November production estimates due to be released on Dec. 6.
It is interesting to note that this signal comes at a time when current estimates suggest that ending stocks are expected to contract for a fourth straight year in 2017/18 to 1 million metric tons given Agriculture and Agri-Food Canada's latest projections. That would be the lowest stocks seen in five years. This is indicated by the forecast on the accompanying graphic, represented by the green bar, which is measured against the secondary axis on the right.
The current $8/mt spread is the weakest seen on this date since November of 2013/14 (black line with markers) when the spread was reported at minus $9.40/mt, a year when ending stocks reached a record 3 mmt as seen on the accompanying graphic, three times larger than the current AAFC forecast for the current crop year.
Heavy front-end deliveries may be partially to blame. As of week 15, or the week ending Nov. 12, a reported 6.08 mmt of canola had been delivered into licensed handling system, a record volume for this period, up 5% from last crop year and 19.6% higher than the five-year average. Over the past five years, an average of 31% of total licensed crop-year deliveries were delivered in the first 15 weeks of the crop year. This average pace would project to total potential crop-year deliveries of 19.6 mmt for 2017/18. This is roughly equal to the total volume delivered by producers in the 2016/17 crop year.
While basis has shown some modest strengthening in recent weeks, Tuesday's average prairie basis based on accessible internet bids is $27.37/mt under the January. That's close to equal to the three-year average for this date -- again, years when stocks were much higher than the current crop-year projection.
Current signals could suggest that there was more canola taken off than previously thought, or the current pace of demand is not expected to continue.
Cliff Jamieson can be reached at firstname.lastname@example.org
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