March Canola

[jdepape]

Canola spreads have been inverted this crop year until now - in spite of supply. A direct result of delivery terms indicating the short that delivers against futures (the elevator) has to provide the railcars to the shipper (they come out of their car allocation). In times of poor rail service (like last year and this ytd), graincos are reluctant to deliver because they don't want to give up their railcars.

Nov/Jan was at $14 OVER on first notice day. Jan/Mar was at $12.50 OVER on first notice day.

Any long fund would have done very well at the expense of the shorts (elevators) rolling through those spreads.

Now we are at/near first notice day on the Mar and Mar/May collapses from $6.80 OVER a week ago to $8.40 UNDER yesterday - mostly in the last two days.

What has changed from previous expiries?

The futures rally has made cash prices attractive - even with basis getting lowered every time futures move higher - generating healthy farm deliveries. Now, the system is choking on canola - the highest visible stocks all year.

I believe a grainco has finally said "enough is enough" and will not roll his short position forward at a loss though an inverse and will deliver if need be - even at the risk of having to give up railcars.

[farming101]

So, if there are going to be deliveries against the March, any guesses where prices will go before expiry? Could get interesting. Or not.

[jdepape]

When it comes to futures delivery, its not so much price that matters - basis and spreads are the key.

Even with the potential delivery looming over the March, canola is up $7.10 in the Mar as I write this. But the May is up $7.90. And average basis is about 30 under.