Inverse versus Carry

[farmaholic]

ICE: Canola inverse
MGEX: Wheat carry

I realize they're different commodities and exchanges.

Can the people in the know/analysts explain why?

When Grain Cos buy in the country I bet they roll early on canola and use the nearby on wheat.

[charliep]

Don't know why risk management strategies would be any different for ICE canola or MGEX wheat. The only thing that might make canola different is the risk of another commercial staying long/standing for delivery on the July contract.

[Hopalong]

Would expect growers to also take advantage of inverse and carry when opportunities arise.

[farmaholic]

I brought this up because of the inverse in canola. Seems all we ever heard was there are ample supplies and soyoil is weighing on canola prices. Then why the inverse. I always thought an inverse was a signal to sell because they want it now. Also how the Grain Cos would roll to the next "cheaper" month earlier than needed when they set their county price.

So why the inverse?

[farmaholic]

I used to take "advantage" of carry in the canola futures by signing DDCs. That option doesnt seem to exist because of the inverse and early rolls by Grain Cos. Something seems fishy. Now it seems to be TPAs and GPOs they only want to offer.

[bucket]

Let's see. I found a new roll of tin foil.

1. Farmers overstated production.

2. The trade did their surveys and found it was a massive crop.

3. Statscan confirmed the large crop.

4. No one tapped on bins or walked fields that made these claims of large supplies. It is really is just hearsay and rumour.

5. Boom all of a sudden some of the big boys are out of canola the bins have been swept out. Now how the **** do we get product. Shit we have to be using the phone and bidding the market.

6. No one would have noticed had an early spring resulted in an early harvest along with the weather over the last 4 years.

7. 21 million acres with average of 26bpa is a 12.5mmt crop. See how an industry that needs 15 mmt deals with that.

8. The canola councils lofty goals are right on track. Because it's going to be wall to wall canola in 2016.

Regards , the dumb****led farmer.

[farming101]

With prospects for 5 year low crop production a real possibility, I think carry in the November contract will return. There is only weeks left for this to make any difference. July canola will be in delivery before long. Basis might mess with a guy's plans to price some canola for fall delivery.

One reason the inverse is there now is because there is steady demand. Stocks in Primary and Process elevators have been dropping for 4 weeks running.

[farmaholic]

Hasn't ICE canola been inverse all winter?

[farming101]

Yes, there has been an inverse in both futures and cash prices for a long time. Canola has been moving well (except for a few logistics problems this spring). Commercials didn't mind taking ownership. Even with poor basis in some parts of the prairies the seed just kept coming to town.

[farmaholic]

Just to be clear, I understand why the inverse now, but all winter?
Charlie when did it go inverse? Was it inverse last fall in Oct when it was flirting around $400/tonne?

[farming101]

Not Charlie, but here is a spread chart for Nov 14/July 15.
There was carry in the futures last September but it would have been wise just to do a spread trade to try and capture some of it.
Selling physical and replacing with futures/options would have been another strategy.
Cash canola last September was a fair bit under $9 if I remember right.

<a href="http://photobucket.com/" target="_blank"><img src="http://i1211.photobucket.com/albums/cc421/farming101/Nov%2014%20July%2015%20spread_zpsuq5osoy2.jpg&quot ; border="0" alt=" photo Nov 14 July 15 spread_zpsuq5osoy2.jpg"/></a>

[charliep]

Not sure on your question. New crop (November) has been at a small inverse to old crop months for the past 6 months. Range on the November 2015 contract was $440 to $460/tonne. July $450 to $470. The normal assumption is that markets pay carry in old crop to the end of the crop year when bins are supposedly empty. New crop/harvest occurs and the prices are lower. In the current world, I also would want to hold any July position from here forward unless I was a commercial long willing to stand for delivery. Could be some fireworks ahead. Most grain companies/crushers will be using November for their all their old crop hedging activities. In other, some longs wanting to hold positions. Short who want out. Volatility with vent to higher prices. Not saying will happen but the risk.

[charliep]

Thanks farming101. Hard to teach an old dog new tricks to post things.

[charliep]

Just checking but is that the November 14 contract? I see RSX14.

[farming101]

Yes, Farmaholic was asking about last fall's situation so posted Nov 14/Jul 15 spread