Mecardo Analysis - A recap on canola
- By: "Farm Tender" News
- Cattle News
- Aug 21, 2018
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By Andrew Whitelaw | Source: ICE, Matif, Mecardo
In recent weeks our focus has largely been on the wheat and feed market, as this will be the primary driver on most farms this season. Today however, I thought it was timely to produce a recap on canola, especially in light of deteriorating conditions in Canada.
There is no valid canola contract in Australia. There was an attempt to produce one through ASX, however, the liquidity is non-existent. Therefore for hedging, we must use overseas exchanges. The contracts available are Matif (France) and ICE (Canada).
They both have a relatively high correlation with Australian prices. Since 2010 the correlation for ICE has been 0.77-0.80 and with Matif 0.87-0.91, with 1 being a perfect correlation. A full report which we produced examining correlations for canola was written last year ‘Canada or France for hedging’.
In Figure 1, the seasonality for the ICE contract is shown. As we can see, 2017 & 2018 have largely followed the long-term average. The conditions in parts of Canada are starting to deteriorate as dry conditions ravage the crop. If these dry conditions continue, they are very likely to result in reduced oil yield.
In Figure 2, the seasonality for the Matif contract is shown. After trading at the bottom end of the range since the end of 2017, from June onwards a strong rally was experienced as a result of the poor conditions in France and Germany where the bulk of the European rapeseed crop is grown.
The continuous spot contract for Matif and ICE (A$/mt) is displayed in Figure 3. During the past two months, the premium for Matif over ICE has increased dramatically, as the drought bit into production. There is a reasonable chance of the spread narrowing as Canada inches closer to harvest.
Key points
* The ICE contract has closely followed the long-term average for 2017 & 2018.
* The Matif contract commenced the year at the bottom of the range, however, drought conditions in France and Germany have seen it rise significantly in the past two months.
* The rise in overseas futures and local drought premiums (especially NSW), should, in theory, lead to strong pricing.
What does this mean?
The increase in futures overseas has a direct relationship with the price we receive for our canola. The lack of production, in NSW especially, should in theory lead to a strong drought basis in conjunction with the possibility of higher futures pricing.
Overall, I don’t tend to advocate physical sales of canola as it can tend to be impacted by a range of factors (hail & frost) between now and harvest.
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