The recent shakeup in canola prices may have been caused by the debt-quake at Saskatchewan Wheat Pool that has been sending tremours through commodity markets.
When farmers who were storing canola in Sask Pool elevators realized a couple of weeks ago that the company was in danger of going bankrupt, they rushed to sell the grain.
“They had no choice,” said commodity trader Ken Ball of Benson Quinn GMS. “If they didn’t act they risked having their grain tied up in a bankruptcy.”
Ball said farmers were well acquainted with Sask Pool’s problems, but had not accepted that bankruptcy was a possibility. When they woke up to the danger, they moved fast.
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“The reaction was immediate and swift,” said Ball.
“Over the course of two or three days as word spread around the Prairies . . . growers just en masse started pricing out their basis contracts.”
Many farmers had canola with basis contracts sitting in Sask Pool elevators, Ball said. They were waiting for a rally before locking in a sale price.
When they realized their grain could be considered Sask Pool property if the company went bankrupt, their first reaction was “I want my cheque,” said Errol Anderson of Pro Market Communications.
Ball said even farmers who had canola sitting in pool condo storage began to worry that their grain might be affected by the company’s problems, even though grain in condo storage is still owned by the farmer.
As farmers locked in prices with the pool, the company in turn hedged its exposure by selling canola futures. The rush of sell orders caused prices to drop.
Some buyers, realizing the surge of orders was caused by nervous farmers, decided to hang on and allow the price to slide further.
Normally, when canola futures fall by $5 to $10 per tonne, farmer selling tends to dry up as they wait for better prices to return.
But this time people knew farmers weren’t going to wait, Ball said.
“Buyers realized that these growers were going to continue pricing no matter what the price did.”
“Growers really had no choice but to get it done, and buyers sensed that.”
Farmer selling started the fall, but it became a landslide only when commodity funds began selling. As they raced to sell, they drove the market sharply down, Ball said.
But the market rebound was also sharp. After farmers affected by the Sask Pool situation had priced their grain and the pool stopped its heavy hedging, much of the downward force disappeared and market sentiment shifted to thinking that the price had fallen too low.
Suddenly the funds tried to buy long positions, but with poor demand from users, they chased the price back up.
“Seeing that canola was oversold, they all reached the same conclusion at the same time that it was time to capture those huge profits on their short position,” said Ball.
“Once the selling abated, the funds tried to capture their quick and luscious profits, the market shot up by $17 (per tonne) on that Friday (Jan. 24) then up $6 or $7 at opening on Monday (Jan. 27).”
Anderson said there were several other causes for recent weakness in canola prices, but the sudden volatility was due to the crisis around Sask Pool.
“This sudden washout in canola Ð if Sask Pool had been OK, canola would not have been slammed like that.”
