Futures markets in inverse relationship | Short-term pricing opportunity for old crop
A major crusher has a simple explanation for a canola market conundrum perplexing traders and analysts.
Nearby futures have been at higher values than deferred contracts since late April, which is unusual.
That inverse relationship in canola markets has many people scratching their heads.
“Most traders I’ve talked to go, ‘I don’t know why it’s doing that. It shouldn’t do that. We’ve got lots of canola,’ ” said Chuck Penner, an analyst with LeftField Commodity Research.
Some analysts have speculated that there is a lot less canola than the nine million tonnes Statistics Canada said was in farmers’ bins and the handling system as of March 31.
Penner wonders if a major export customer has ramped up purchases.
“(Maybe) suddenly somebody has come into the market in a huge way,” he said. “This is a big play, either fundamentally or technically that somebody is in trouble.”
Aaron Anderson, assistant vice-president of western grains for Richardson International, said statistics provide the explanation for what is happening.
Last year, growers harvested a 13 million tonne crop and had the tightest carryout in history. In 2013-14, they bounced back with an 18 million tonne crop, the largest crop on record.
Yet grower deliveries and exports are nearly identical. Growers had delivered 11.4 million tonnes as of May 4 compared to 11.2 million tonnes a year ago. Exports are 6.3 million tonnes, compared to six million tonnes a year ago.
Crushers and exporters are uncomfortable with the pace of deliveries, which is why basis levels have improved by $25 per tonne over the last month and futures markets are in an inverse relationship.
“The industry is expecting this crop to be marketed at a quicker pace,” said Anderson.
Canola stocks at the ports, primary elevators and in transit amounted to 876,000 tonnes as of May 4, down slightly from 891,000 tonnes on hand a year ago.
“You’ve got much more sales on the books than this time last year, but your available stocks going into seeding are at or slightly below last year, which is giving people a little bit of an uneasy feeling,” said Anderson.
He expects growers to start selling once seeding is over and the market to return to a carry relationship. Growers might want to consider that.
“It’s a short-term pricing opportunity for your old crop canola against the July (futures) based on nearby logistics,” said Anderson.
The inverse started in the last couple of days of April when the shorts in the market needed out of their position because they didn’t want to deliver on the contracts. They couldn’t afford to because they needed all the stocks they had for their export or crush positions.
“That created a little bit of nervousness in the marketplace,” he said.
The market is worried growers are comfortable carrying over more than three million tonnes of canola.
Farmers have priced more wheat in their bins than canola and are moving the commodity in huge volumes. They have delivered 14.9 million tonnes of wheat, up 1.5 million tonnes from last year.
“The future appreciation opportunity in canola is probably greater than wheat,” said Anderson.
Another development in canola markets is that open interest in the commodity has plummeted to 160,000 contracts as of May 15, down from 230,000 contracts in mid-April.
“Every day it has dropped, so somebody is getting out of their contracts,” said Penner.
“I don’t know who that is and I don’t know why.”
Anderson has a theory on that as well.
“The market is neutral or sideways. It has been in this sideways market for such a long time. There is no direction whether we’re going higher or lower, so the speculators are out of it,” he said.