Canola market doldrums need cautious risk management

First, canola futures slid from $520 per tonne to lower than $490.

Then prices bounced back $10 to almost $500.

How do you get a sense of the price range from that? What does the slide mean?

What does the bounce-back mean?

Lots of farmers and marketers are pondering that after December’s drama. The same happened after the September-October rally, which took canola from $490 to $520.

Right now it’s hard to get a sense of direction from the canola market, with such powerful short term trends — unless you stand way back from the chart. Then you’ll notice that canola is still within a range it has inhabited for many months.

Can we just assume that the $480 to $520 range is still intact and price accordingly? That would be easy, and with no compelling evidence to the contrary, that’s what many are doing. When canola gets to around $520, they sell some. When it gets down below $500, they sell only what they need to move.

New crop 2018 pricing is similar: futures are hanging around the $500 mark.

“It’s not just a canola issue, it’s all oilseeds,” David Derwin, a risk management specialist with P.I. Financial, said when I chatted with him the other day.

Outside of the short-term rallies and slumps, it’s been a period of doldrums.

That has made it a great time for cautious risk management. With prices so range-bound, option premiums are relatively cheap, so some brokers are buying their clients price insurance above the $500 level with puts. Others are buying calls in order to allow farmers to sell now and still have a chance at the gains of a possible future rally.

That doesn’t mean people should lie back and assume the $480 to $520 range will hold for the rest of the crop year. As canola prices slid through December, everybody was watching the $475 to $480 level to see if it would hold or break. If it had broken, then anything could have happened.

Beneath $480, one can look at support at $450, or $400. Falling to $400 seems far-fetched right now, but as Derwin noted, “there’s nothing to stop canola getting down to $400 again.”

And broker Errol Anderson already thinks the range has moved, even though it will be a while to see if this is borne out.

“I think the March contract will respect the $500 area as the top end,” he told me.

He still sees $480 as the bottom of the range, so it’s a narrower range he’s looking at.

The problem with ranges is you can never be sure whether you’re actually living within one until they’re over. You can look back and see them on the charts, and they seem pretty clear, but you can’t look forward into the future to see if recent apparent trends will continue for long enough to truly prove that a range was in play or to show when they end.

However, as traders always like to say, what we have is what we have, and you have to work with it.

And as always, the trend is your friend.

Until the end, when it bends.

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