WCE or US bean oil price discovery

[wd9]

Just want to get some thoughts on whether the WCE canola contract should be Canada's source of price discovery or if it should be the US bean oil price that discovers our price. Any thoughts on this would be greatly appreciated.

[TOM4CWB]

WD9;

The drought in 2002 was a real eye opener on Canola oil prices.

Rationing of Canola oil put Canola oil five cents per pound above soyoil... where historical levels are around par if I am not mistaken.

If a surplus of Canola oil exists... substitution with lower value veg oils draws the price lower... so my answer would be that there is a direct link... (soy to canola) but don't count on it for a hedge... as the "basis" risk could be large!

[charliep]

The thing not mentioned so far is currency risk. A portion of the rally in soybean oil can be related to the decline in the value of the US greenback relative to other world currencies. Lots of uncertainty. Canada is perhaps in a bit of a better situation in that the loonie is likely to stabalize relative to the US dollar but that story will be told down the road.

Crush also needs to followed in the US. The US soybean market has to put the brakes on somehow (or encourage South American imports with the issue of soybean rust in the background). If US crush slows, soybean oil supplies will tighter up. I think Canada will keep up a canola crush pace of 60,000 tonnes/week or a total crush in the 3.2 to 3.3 MMT range.

In your question WD9, are you talking about WCE canola futures vs soybean oil for price discovery purposes or as a hedging/speculative tool?

[wd9]

Either. Are we getting the best price for canola by using the WCE contract? If not, what should we be using?

[charliep]

In my opinion, a healthy WCE canola futures is still the best way to establish value for this crop. As Tom4cwb indicated, there are many other factors that go into canola prices other than just soyoil (protein meal prices, currency, premium/discount soyoil to canola, etc.).

The challenges are to make sure WCE canola futures remains a viable contract and maintains a consistent relationship with the cash market. With fewer players in the market, more direct cash trade conducted completely outside the futures market and the trend to specialty oils, this is becoming more difficult.

Another interesting project I have been looking is risk management for cattle in the new post BSE world. The cattle industry relied 100 % on US markets to manage risk. Basis risk existed pre-BSE but the cattle industry was able to deal with it. In the new world, basis risk is humungus to the point where all the old risk management tools are not able to be used. Some members of the cattle industry are looking at new tools to fill this void. Cattle is not canola and vice versa but there are maybe lessons to be learned.

The question comes to the effectiveness of the current WCE canola contract in establishing prices. What are others thoughts?

[TOM4CWB]

Charlie;

Even specialty Canola Oil contracts are risk managed useing WCE futures... it is imparitive that this exchange contract be functional and operate with integrey.

It may be time for the Alberta Commodity Exchange... for cattle, milling wheat, canola oil and meal!

What do you think CHarlie?