A crowd of speculators and commodity funds have piled up a mountain of short futures positions in crops like canola, but most analysts think they don’t have to fear that those positions will collapse on them.
The canola market has little reason to do anything but go lower right now.
“Traders have been short all these markets for a long, long time, and we do get these rallies for a brief time along the way as people cover, but there’s nothing to say they’re not going to press this thing down for months to come,” said broker Ken Ball of Union Securities in Winnipeg.
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“To say that eventually these shorts will cover is like saying eventually canola will stop going down. You’re not saying anything by saying that, because we all know that.”
For months speculators have been selling futures contracts, hoping that the price of the contract will have fallen by the time they need to offset the contract. For the past few months, each time one of the contracts has neared expiry, the short speculators have been able to buy back their contracts at a profit.
Buying back the contracts has occasionally caused a brief uptick in the price of canola, but soon it falls back.
Most of the speculative traders have simply rolled over their positions by closing out nearby contracts and taking new short positions in further out contracts.
That is beginning to happen with the March contract, which short speculators will be buying back and replacing by selling May futures positions.
Buying back the March positions may cause a slight upward pressure on that contract, but the selling of the May positions will put downward pressure on the market.
“We expect the shorts in the market to merely roll their shorts from the March into the May as a spread, as opposed to buying out their positions, meaning a continuing trend in the market to grind lower,” said Tony Tryhuk of RBC Investments.
Farmers may hope the short positions of the speculators will cause the market to turn around, but Ball said that will only happen when shorts need to close out their positions in a rising market. Right now longs have much more need to get out of their positions.
Unfortunately some farmers have become stuck with losing long positions they opened as crop replacement strategies. Some farmers who sold cash canola at what they perceived as unreasonably low prices speculated that the market would move higher, so they bought canola futures contracts, hoping to gain on the futures what they lost in the cash market.
“Any speculators that have been speculating on cheap canola prices are taking quite a bit of pressure here,” said Ball.
“Cheap is not a reason to buy. You want to buy something if it is going up. Right now it’s the opposite. It’s the long speculators that are being forced to do something about it.”
Tryhuk said low canola prices are based on the market seeing lots of canola and soybeans and little demand to eat them up. The negative trend is likely to continue.
“Technically there’s no reason (for the market to turn),” said Tryhuk.
In 2000, prices hit rock bottom at $241 per tonne, and “that’s a target for some of the technicians,” he said.
Ball said farmers can try to sell on some of the mini-rallies that may occur at spread rollover times, but they will have to be fast. Often these rallies last only a day or two.
There is a lot of canola on a lot of farms, so any short-term demand is likely to be met quickly.
“There are going to be lots of growers looking to sell into any good rallies,” said Ball.
