More upside likely in old-crop canola

ICE Futures Canada canola contracts moved higher during the week ended May 15, with the largest gains in the old-crop July contract as tightening supplies and bullish technicals provided support.

The current open interest in the July canola futures, of around 70,000 contracts, represents about 1.4 million tonnes of canola.

With ending stocks for the current crop year forecast at only around 500,000 tonnes, that means there are nearly a million tonnes of non-existent canola that traders holding short positions will need to buy back or source from somewhere in order to deliver against the contract, said Wayne Palmer, senior market analyst with Agri-Trend Marketing.

As a result, he said there was more upside potential in old-crop canola.

The spread between the old-crop July canola contract and the new-crop November widened out to $84 per tonne during the week, from $66 per tonne. Palmer said that spread could widen out to $100 or more over the next few weeks, as participants work to exit the front month.

Traders holding long positions will dictate what happens next, by either letting the shorts out of their positions or forcing delivery, said Palmer.

However, the complicating factor this year is that the shorts won’t be able to find the physical canola to deliver, which means they will likely be paying up to get out of the July contract.

“We’re in for some excitement for the next six weeks,” said Palmer, adding “the fireworks will start in early June.”

If domestic crushers decide to close their plants ahead of the new crop because they can’t source enough seed, they will start liquidating their long positions in July and booking profits in the futures, which would limit the upside potential, said Palmer.

For the new crop, activity will follow the CBOT (Chicago Board of Trade) soybean and corn futures more closely, said Palmer, with the direction of the futures depending on weather conditions in both the U.S. and Canada.

— Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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