Mecardo Analysis - The basis of canola
- By: "Farm Tender" News
- Cattle News
- Jan 22, 2019
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By Andrew Whitelaw | Source: ICE, Matif, Mecardo.
Last week I was contacted by a premium subscriber, who asked the question ‘What is wrong with the canola price’. I thought it was opportune moment to take a look at pricing levels and determine if there is anything wrong.
The drought has ravaged the canola crop, with much of it being cut early. The result has been production nationally dropping to 2.24mmt, well below the decade average of 3.5mmt since the turn of the decade. We would therefore expect prices to rise dramatically.
This has been the case. In figure 1, the canola spot price across Geelong, Kwinana and Port Kembla is shown since 2009. We can see that during the early part of harvest prices in Geelong & Port Kembla reached their highest levels in the period. Kwinana has also risen strongly but not to the same level as 2010 & 2012. This makes sense as the drought in 2018/19 is focused on the east coast.
We would therefore expect that as local conditions worsen that basis* levels would increase. There is no local canola futures contract*2. To hedge canola, it is therefore required to examine futures in overseas the markets, the main ones being Canada (ICE) and France (Matif).
In figure 2, basis over ICE is displayed, and we can see that levels have increase substantially throughout the year and increasingly so since mid-year when conditions started to deteriorate.
The same pattern emerges with Matif (figure 3), however the rise occurred later in the year. The later takeoff of basis to Matif can be attributed to the poor conditions being felt in European growing regions (Germany & France).
*Basis being the premium or discount over futures levels.
*2 There is an ASX canola contract but it has no liquidity.
Key points
* East coast canola prices have reached decade record levels during early harvest
* There is no viable canola futures market in Australia
* Basis to Matif (France) and ICE (Canada) futures contracts are at decade record levels.
What does this mean?
The canola market has risen in the past 6 months to very strong levels. The difference between the wheat and canola price rise, is that wheat has reached astronomical prices which have never been experienced since deregulation. The Canola price on offer has been close to being met in the past decade.
However, although the flat price doesn’t appear to be at extreme levels, we are receiving basis levels which are at record levels since the start of the decade.
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