CGC Visible Stocks Canola

[rain]

Charlie what are the reasons for the high visible stocks of canola?

[charliep]

High carryover from 2001/02. Strike in Vancouver. Poor quality when most customers require #1. The big reason is the market functioning. The role of price is to ration demand by forcing customers to buy other alternatives. The same thing has happened with barley. Sometimes it does too good a job.

An interesting comment and perhaps why I am congratulating myself too much is perhaps lower prices are a good sign of higher prices. When prices have dipped previously, it was enough to attract new buying (2 cargoes Pakistan). Farmers will hate me for saying this but perhaps the current low prices (not low relative to history) and maybe going lower are a good omen.

The point to make is how important it is to have a market plan and be prepared for these bumps and bruises. Someone who has sold enough to meet cashflow and can wait to sell more is in good shape now to wait out this market (no guarantess). Someone who is forced to sell is in deep poop.

[rain]

Are the conola stocks sold, or do the grain companies own it on spec. Seems to me prices are dropping mostly on talk of all the canola stocks.

Generally grain companies buy what they have sold and make there money on the basis.

If these stocks have been sold already should we not be adding these stocks to crush and exports as opposed to supply on hand.

If you add 800,000 tonne to crush and exports thing are tight, if you add 800,000 tonne to supply thing are not tight.

Help me I am lost!

[charliep]

Not so sure how to answer. Grain companies will have a sales plan with an objective of having customers arranged and use of their facilities planned. Grain grain may be holding for exporters/end users have forward bought product and have in the grain system to cover these sales. They may also hold this grain on spec in anticipation of making sales (long cash). They will cover their price risk while holding with futures.

My guess is the grain companies got long cash early to make sure they had supplies to cover their sales program. A combination of lots of storage capacity in a drought year and customers who needed access to drying also pushed them to store more.

When I look at these numbers, I look at inventories relative to sales opportunities. In a former life with better access to information, I could separate out the portion of commercial inventory that had been forward sold and stuff that was held in anticipation of sales.

[rain]

If we normally have 400,000MT in position, and we currently have 800,000MT your best guess would you the the companies have 400,000 tonne of spec Canola?

[charliep]

No way of knowing. My guess would be 2 months supply for foreward priced Japanese sales (200,000 to 250,000 t), the Pakistan business - don't think its been shipped (100,000 t) plus whatever the crusher is holding in storage (keeping in mind relationships between crushers and grain companies).

A note is this number has come down from 1.2 MMT not that long ago.

My thoughts are the canola market is moving south more the momentum side and the fact no buyers are willing to step in to stop the slide.

[melvill]

rain, in your example it's probably pretty safe to say that the 400,000 t of "spec canola", as you describe, it is not spec in the sense that they've bought it with the idea of holding it until the price would goes up. It's spec in the sense that they bought it ex-spec-ting to have a sale for it. However, they are not totally dollar risk free in their seed purchases. Their risk would be basis risk - ie. their risk is that they are forced to sell it at a basis that was stronger than what they bought it at. This year there is the additional risk of not being able to move seed containing lots of green - that ends up showing up in sales basis levels. Futures price risk would have been covered using WCE canola futures. In most years, the futures component of price risk is much larger than basis risk.

[melvill]

Woops got basis risk backwards. Grainco basis risk is that they'd have to sell the product at a weaker basis than they bought it at or they've incurred large interest and storage costs while waiting to make the sale.

I know, I know. Forty lashes with a US durum spaghetti - poor quality durum, poor quality noodle - won't last 40 lashes.

[rain]

OK Mellville in your opinion is the extra seed for blending purposes, or hopefully sales down the road.

According to CGC numbers crush and export are doing OK, for this year so far.

[charliep]

What I hear you asking is whether some demand/extra sales (either in the market today or just around the corner) are lurking around that may provide an extra boost to prices. Hard to say.

What I can say.

1) There has been good buying activity that has shown itself on dips. The market floats down and then pops higher. A note of worry is the market cannot sustain these rallies.

2) Commercial inventories are coming down. Following this observation, I would note that farmer deliveries have been steady (equal to last year) as farmers filled contracts, sold tough/damp canola and took advantage of high prices.

3) I think canola deliveries will remain relatively high during March prior to road bans/seeding (cash flow, selling higher moisture/green canola prior to spring, etc., etc.) and then slow down (seasonally). People that have cash flow/comfort that their crop will store will carry into the summer. Deliveries wll slow to a dribble April on.

4) I am watching S. America soybeans carefully. There is a whole pile of product to be sold. Discipline of South Americans and whether the demand side continues strong will have major impact on canola.

5) Hold into the summer and you are 100 % at the mercy of a weather market (or perfect weather on the other hand).

I agree with your observation about using rallies to sell this market and look for other speculative opportunities to replace inventory with futures/calls (if you must - nothing wrong with selling $8.75 to $9/bu canola on rally and simply banking it - the only thing that is hurt is your ego that you could have sold for $10/bu).