Old/new-crop canola spread to widen further

ICE Futures Canada canola contracts have climbed higher in recent days, with the old-crop months posting the largest gains.

The spread between the old- and new-crop contracts is expected to continue to widen, as tightening old-crop supplies will be countered by expectations for record production in 2012.

As of the close of trade on April 25, the July 2011 canola contract was sitting at $630 per tonne, which was $47.90 above the new-crop November contract currently sitting at $582.10. A week ago that spread was at $38.40 per tonne.

Ken Ball of Union Securities in Winnipeg said most of the strength in the front months was tied to fund traders holding large long positions, pressuring the shorts to cover ahead of deliveries on the May contract.

With physical supplies on the tight side, the traders holding short positions don’t want to be forced to deliver and are being forced to exit the market.

That short-covering activity could see the two front months challenge the $700 per tonne level before all is said and done, according to Ball.

However, the important thing to watch will be basis levels in Western Canada. If the basis doesn’t widen out to compensate for the gains in the futures, it would be a sign that the end users are really scrambling for supplies.

"If they’re willing to take the same basis at $700 as they were at $600, then you know that they need some canola fairly desperately," said Ball.

The November contract will be pulled along by the old-crop contracts, but Ball said the expectations for record-large acres would temper the upside potential there and cause the spreads to widen out.

Grower hedge selling in the November contract was also expected to temper the upside in the deferred months.

One factor that could boost the new-crop contracts would be if the outside markets, including soybeans or equities, saw some larger price swings, said Ball.

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