Canola Inverse

[crusher]

Hi Charlie/Errol,

Need some help understanding the reasoning behind the canola futures situation. Comparing March to July, canola has a 3% inverse, Beans 1.5%, bean meal 2.3% and bean oil has a carry of 1.2%. Please explain to me the large canola inverse. There is no South America canola crop coming. Only thing I've heard is that line companies are afraid to do any business because they don't know if they can source supply. Current spread is $18/tonne, getting to look like a July/Nov spread.

[charliep]

I would have similar thoughts to what you have indicated. With South American crop available in a couple of months, likely all meal and vegetable oil buyers are likely hanging back in the market. Everyone will be doing business in the nearby with further out months having less incentive to do anything. Not a lot of reason/desire for the speculative community to push the market higher either/remove the inverse.

An opportunity to sell cash to capture the premium on the front end/good basis and replace with cheaper May/July futures or call options? Not recommending - just an alternative.

[crusher]

January delivery with a $30 July basis is available. If I keep canola in the bin for summer I don't think I will see $30 basis later on. I think the trade is about to receive another 10% of my production.

[charliep]

Just to add to the confusion, I will post this weeks COPA report. Board crush margin is narrower on the March versus May/July. CGC grain stats weekly not out but commercial stocks have been tight relative to the level of use.

[URL="http://www.copaonline.net/documents/COPAWEEKLYJANUARY162013.pdf"]COPA[/URL]

[boarderbloke]

crusher, would that be to a crushing plant or to an elevator?( 30)
best I'm seeing here is 25.10, that's to an elevator.SESK

[crusher]

So it looks like the margin is better by about $25 for July. Maybe the crushers will slowly start to bid it up after Cargill gets through their short term squeeze .

[boarderbloke]

plus sign doesn't show up in the post.
I'll try again, here, we have plus $25.10 Feb Del over JULY futures, as you were comparing w/ plus $30. But was your quote to a crushing plant?

[errolanderson]

crusher . . . July is simply a poor
demand month for canola.

Crushers sales are competed and plants
are down for maintenance. That's why
personally don't like July basis
contracts.

How this can change is; if weather in
western Canada struggles in the spring.
Then this inverse will start to go away.
But if weather is normal . . . it could
get even worse as new crop South
American supplies will be flooding into
the global market by May.

[ajl]

It does appear that crush plant staff are
planning holidays in July and August. I
imagine that they will be a quiet as a
morge then.

[crusher]

Cargill Edmonton plus $30 over July, immediate delivery.

[errolanderson]

Opening my big mouth again thay I should probably keep shut more often, but bare with me . . . .

Example . . . growers are being offered say $30 over March or $35 over July. Why not book the March and then invest the portion of the inverse into call options? My thinking is you will get the cheque, cut your downside risk, but still be on-board should canola blow higher due to spring weather problems.

Growers believing there may be a 'pot of gold' into crop year end if you are the last one to sell physical canola are taking on a big risk (IMO).

[vvalk]

What does the size of the brazil crop really
matter? They only have logistics to export so
many soybeans no matter what the size of the
crop is. The world will have to buy so much
from the USA every month no matter what. That
is why old crop will have to move higher

[errolanderson]

vvalk . . . not trying to stir the pot too much, but cheaper South American crop entering the global markets will kill demand for American soybeans before crop year end.

Just look at what happened to the cattle market this week. Ten days ago, this market was bulletproof. Just buy cattle and then go directly to the bank was the advice of many American analysts. They just got their ass handed to them.

Demand is everybit as important as supply for price discovery.