Consider carrying costs when marketing canola

The current futures market is in a strong carrying charge situation, says analyst

With a large canola carry-over and the uncertain China situation, producers need to consider carrying costs when marketing the crop, says a provincial crop market analyst

Given the large inventory and currently restricted demand, the canola futures market is in a strong carrying charge situation, said Neil Blue. The futures market is priced significantly higher in successive futures months within this crop year.

A carrying charge market is a typical market where the higher prices into the future pay all or a large portion of the costs of storing crop from one period to the next.

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“The higher successive canola futures prices are not a forecast for higher prices into the future,” said Blue. “They reflect the current carrying charge that the market builds in for storage, interest and insurance.”

He explained how to calculate the full commercial cost of carrying crop using the 60-day period of January to March.

“Using a commercial storage rate of $0.12 per tonne per day (actual rates vary), 60 days storage totals $7.20 per tonne,” he said.

With an interest rate of four per cent and $462.10 per tonne for January futures, the calculation would be: $462.10 per tonne times four per cent divided by the portion of the year (in this case, 12 months divided by two months). That works out to $3.08 per tonne.

Insurance is a smaller cost, so it’s the storage and interest costs (a total of $10.28 per tonne) that are key here.

“If the canola market was trading at full carry with January canola futures trading at $462.10 per tonne, March futures would be trading at $472.38 per tonne.

“In this example, with the actual March futures at a $9.50-per-tonne premium to January futures, the March futures is considered to be trading at 92 per cent of full carry (9.50/10.28 x 100),” said Blue.

“A futures market for a storable commodity that is trading near full carry is generally well supplied relative to demand.”

This means the futures market is offering the producer a fee to store canola, but that storage payment is only collectable if the producer takes some form of forward pricing action, said Blue.

“Using current futures prices, if the canola market traded sideways for the two months from January to March, by the time March arrives, the March canola futures would have fallen by the $9.50-per-tonne carrying charge to about $462.10 per tonne. As time passes, the carrying charge erodes out of the market.”

One action to capture the carrying charge in the market is to forward price using a deferred delivery contract with a canola buyer. Forward prices, the result of futures prices minus basis levels, vary among canola buyers.

“To judge a best price for your canola, you would shop among the various buyers for the best farm gate equivalent prices for those forward delivery months,” he said. “You can then determine how much of the carrying charge within the futures market is being passed along in those forward cash market bids.”

Another alternative for a producer with a futures account is to sell futures for a forward delivery month to capture carrying charge.

“First off, this strategy would retain the ability to shop among the various canola buyers for the strongest basis level to contract at. Secondly, it would avoid the physical buyer commitment of delivering No. 1 canola when quality may still be uncertain. With this futures strategy, usually the futures hedge is removed when the canola pricing is completed with a physical buyer.”

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