Canola - What to Do?

[charliep]

Things are too quiet in here so time to stir the pot.

Canola is higher again today. What actions are you taking? What is happening with basis levels? Still wide?

[rain]

spot basis 24-32 under Calgary

Best basis 15 under May for May

[JACKFLASH]

Charlie:
We are putting the lock on the bin. Basis in our area is as high as 60.00. Signal to hold. Thank God we forward priced some last Jan. Right now canola is 7.40. If the basis narrowed to 20.00,we would be getting 8.30/bu.

[JACKFLASH]

Charlie:
We are putting the lock on the bin. Basis in our area is as high as 60.00. Signal to hold. Thank God we forward priced some last Jan. Right now canola is 7.40. If the basis narrowed to 20.00,we would be getting 8.30/bu.

[JACKFLASH]

Charlie:
We are putting the lock on the bin. Basis in our area is as high as 60.00. Signal to hold. Thank God we forward priced some last Jan. Right now canola is 7.40. If the basis narrowed to 20.00,we would be getting 8.30/bu.

[melvill]

jackflash, as you know, basis isn't the only part of the canola cash price that fluctuates -- canola cash = futures - basis. I agree that the basis signal is to leave uncontracted seed in the bin.

However, what about the futures part of the equation? I've seen the it where we've waited for basis to narrow up or strengthen, however one puts it, by $10 to $15/tonne while at the same time futures has dropped by $30 to $40/tonne.

Anyone working on managing the futures price risk by hedging? I might be tempted to start some scale-up hedging at these levels. Anyone doing that?

[timm]

buy jan .24$ puts for .055$(.23%).(385*2.3%=8.85mt).this should translate into 8$ canola minimum if can find a decent basis in jan.also would have upsise potential till jan.

[crusher]

We are currently 45% sold. My plan is to sell another 25% just below the next resistance level, which appears to be at $392 on the nearby contract. I'll probably sell May to match an April delivery. Hopefully the basis will narrow. I'll be smiling feeding my margin account, knowing I still have more to sell.

I caution growers signing futures first contracts though. I know it beats paying margin calls if the market rises, but the grain company knows what grain they have coming in, and if enough farmers do "futures first", why would they narrow the basis.

[Kasro]

REGARDING BASIS - Basis levels CanAmera Harrowby are -$43 for Oct and -$38 for Nov. Elevators are a bit wider. These basis prices are under Nov futures. Last year at this time, basis levels were $10 better. However as I understand the cash price spread between Vancouver and the country are roughly similar to last year at about $50-$55. Why are futures and cash prices not converging better? Does this point to a dysfunctional futures contract?

REGARDING CASH PRICES - Last year Nov Futures were $270US/MT. This Nov futures are $280US/MT. Last year cash was $250US, and this year $248US...not significantly different. Yet soybeans are $3.00US per bushel higher this year over last year....which is 65-70% higher. Is our price discovery system not working? Was 2002 the aberration, or is 2003? Small differences year over year are explainable due to relative S&D's for each commodity, but for substitutable products such as soybeans and canola, these price variations seem extreme. It seems we may have a dysfunctional futures market, AND dysfunctional cash market.

Comments?

[charliep]

Just a comment and I will leave for discussion. Canola oil cash premiums have dipped from US 6 to 7 cents/lb over to recent levels of more like US 2 to 4 per lb. The issue comes to buying back market share/a return to more normal levels of canola oil in vegetable oil products (lots of soybean oil got inserted consumer products last year). A couple of sources indicate that canola oil could even move to the point it trades even money with bean oil.

Based on 900 lb of oil in a tonne of canola, a US 4 cent decline in prices is about US $36/tonne premium that isn't there now.

[Kasro]

Soy oil is US 10 cents higher than one year ago. If you account for the 4 cent decline in premium for canola oil, it still leaves 2003 oil at 140% of 2002. Meal was US$165 a year ago, and is now over US$200, or about 125%. So why are canola prices only at about 100% of last year in $US? Was it 25-40% overpriced last fall? Even taking into account the change in oil premiums due to relative S&D’s, it seems to me there is still too large a difference between prices for canola versus the soy complex. What piece of the equation have I left out?

[timm]

The GPM (crush) is equal to the price of 48% protein soybean meal (dollars/ton) multiplied by .022 plus the price of soybean oil (cents/pound) multiplied by 11 minus the price of soybeans ($/bushel).

The same calculation used for the Gross Processing Margin is also used with futures contract prices from the Chicago Board of Trade and is referred as the ?Board Crush?.

For example, if September Soybean Meal, Soybean Oil and Soybean futures prices were at $152.60/ton, $.1662/pound and $4.6075/bushel, respectively, the Board Crush would be calculated as (152.60 x .022) (.1662 x 11) - 4.6075 = $.58/bushel.

do we have this for canola????

[melvill]

The part of the equation that's missing is "demand" or more correctly amount consumed. As one analyst (who shall remain nameless for fear that I get a phone call) put it, currently it is US soybean supplies that need to be rationed by high prices, not world ****seed/canola supplies. We haven't had export customers banging at our door to buy Canadian canola or Canadian canola oil. If you look at Charlie's S & D at http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sdd5325?opendocument , or anyone else's S & D, you will see that unless things change, we're not going to have a particularly low carryover even with good, but not exceptional exports and crush.

[melvill]

What do we need to perk up the market and strengthen basis? Sales of seed to China or Pakistan. Guess what? Rumor of a sale of one and possibly two cargoes of canola to an Asian destination, likely either Pakistan or China. Watch for confirmation. Hope the news says two cargoes.

[charliep]

How many of you have used/are using futures directly to hedge? What has your experience been? What arrangements do you have with the bank in terms of margin calls (if they happen)?