Cash Canola

[TOM4CWB]

Charlie;

I see this first thing this morning that Cash Canola is quoted at $420/t while Nov 02 is at $445/t.

Why exactly is the cash Canola falling every day, while the futures rise?

[charliep]

Just a note there is a real wide range of cash canola prices in the country. The Alberta Grain Commission elevator survey show Alberta basis levels all the way from zero to $30 under. Implications - shop the market.

http://www.agric.gov.ab.ca/economic/stats/grdaily.html

Another comment is that most grain companies are offering good prices/narrow basis for early 2003 delivery.

There is currently lots of canola in the system plus more arriving each day as farmers deliver on contracts from this past spring/summer. As a note, there are currently just under 1 MMT of canola in the elevator system, up over 100,000 t from last year. (web site - http://www.cgc.ca/Pubs/GrainStats/gsw_2-e.asp ). In the face of slow demand/strike on the west coast, there is no reason for most (not all) grain companies to compete for supplies. That will not be the case this winter as these supplies are finally moved out.

Canola is one crop I would leave in the bin (assuming its dry) at the current time but would start looking at Jan. to Apr. deferred delivery/basis contracts. If cash flow demands delivery or you have questions about storability, I would talk to your neighbors who are not able to fill contracts and work a deal with them. They may have (assuming they are assignable) some zero basis contracts.

[TOM4CWB]

Charlie;

If there is lots of nearby supply, why are Nov.02 futures still rising?

[charliep]

Not 100 % sure but here are some thoughts.

1) Soybean oil has rallied by 2 1/2 cents/lb over the past. A rule of thumb I use is that a 1 cent/lb increase in soybean oil should add about $14/t to canola. This would add about $30/t to canola - about the rally we have seen over the same period. Implication - Nov. futures gains have reflected increases in canola oil prices.

2) Just a note the market is paying at least some carry (Nov. - $443.50 and Jan. - $449.70). Look for some interesting action on spreads this winter.

3) My thought is that physical ownership of canola will be king for anyone in the grain trade. One method will be to take physical delivery on a futures contract and hold stocks until needed. That is, a grain company may be long cash as a result of taking delivery/forward sold either canola products or seed. This is one I will seek others advice on.

We are headed into interesting times.

[melvill]

AU in Brooks is phoning everyone in sight with canola acres in their permit books. They're offering $10.15/bushel for immediate canola delivery (Oct 31). That's $6.00/bushel under Jan futures which closed today at $453.20. I think I can hear a chorus of auger motors being test-started.

Yes, there is a possibility that the cash price could go higher. But what's wrong with pricing some seed into a rising market that has only seen canola futures go higher in the spring '94, briefly in March '95 and in early summer '96?

[melvill]

OOps that AU canola price of $10.15 is for December delivery not spot October delivery. Still a good deal even if you have to wait a month for your pay check.