Canola pricing strategy

Canola pricing strategy

A look at the canola futures market in a strong carrying charge situation

“Canola stocks at the 2018-19 crop year just ended are estimated near 4 million tonnes, a new record,” says Neil Blue, provincial crop market analyst with Alberta Agriculture and Forestry.

“The carryover at the end of this crop year is yet to be determined, but it may not increase as much as some have suggested. The unfinished canola harvest and unknown timing of potential resolution of the canola trade restrictions imposed by China leaves the 2019-20 canola carryover uncertain.”

He says that in a reflection of the large canola inventory and currently restricted demand, the canola futures market is in a strong carrying charge situation. 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 pays all or a large portion of the costs of storing crop from one period to the next. Carrying costs include:

commercial storage rates – as in a commercial buyer’s facility

interest – typically bank prime interest rate

insurance costs for that crop – a minor cost

Full carry is the total cost of storage, interest and insurance on a commodity.

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

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

“Calculate storage and interest for that period. Using a commercial storage rate of $0.12 per tonne per day (actual rates vary) 60 days storage totals $7.20 per tonne. At $462.10 per tonne for January futures and using a 4% annual interest rate, interest cost of carrying that canola would be $462.10 per tonne x 4% ÷ 12 months x 2 months = $3.08 per tonne. The sum of calculated storage and interest costs is $10.28 per tonne. Insurance cost is relatively minor. 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% of full carry (9.50/10.28 x 100). A futures market for a storable commodity that is trading near full carry is generally well supplied relative to demand.”

What does that carrying charge mean to a canola producer holding unpriced canola in storage?

Blue says that 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.

“Using current futures prices, if the canola market traded sideways for the 2 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 says. “You can then determine how much of the carrying charge within the futures market is being passed along in those forward cash market bids.”

He adds that 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 #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. Meanwhile, while that futures position is held, the carrying charge will erode out of the market, adding potential profit to the futures trade.”

The use of the options market to capture carrying charge is another alternative.

Blue summarizes that a carrying charge for a storable commodity reflects the amount of storage and interest that the market is willing to pay.

“Although a carrying charge market is a sign that the market is well supplied with product relative to demand, some of that carrying charge can be captured through proactive marketing.”

-Alberta Agri-news

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Alberta premier Jason Kenney declared a public health state of emergency Tuesday and sweeping new measures as COVID-19 cases in the province continue to rise. (photo by Chris Schwarz/Government of Alberta)
Kenney declares state of public health emergency as COVID-19 cases rise

High schools shift to online learning, businesses face new restrictions

Pipestone Community committee members and core rink volunteers each put in 600 hours of volunteer work to renovate the Pipestone Community Rink this year. From left to right: Andy Dansereau, Colton Huber, James Huber, and Dave Pockrant. Shaela Dansereau/Pipestone Flyer.
New renovations complete on Pipestone Community Outdoor Skating Rink

New boards and chain-link fence on sides of rink to reduce puck loss.

Silver or grey four-door sedan believed to be the suspects’ vehicle. Photo supplied/Leduc RCMP
Leduc RCMP investigate break and enter to Calmar Post Office

Over 50 packages stolen from the Calmar Post Office Monday morning.

Alberta’s chief medical officer of health, Dr. Deena Hinshaw, announced the province surpasses one million COVID-19 tests Friday. (Photo by Chris Schwarz/Government of Alberta)
COVID-19: Central zone active cases up by 100 in last 24 hours

Most central Alberta communities under province’s enhanced measures list

Millet Fire Department 2019. Photo/ Pipestone Flyer.
Millet Fire Department hosts “Light it Up for Liam” event

The Millet Fire Department is lighting up the fire hall this season with holiday spirit.

Kyle Charles poses for a photo in Edmonton on Friday, Nov. 20, 2020. Marvel Entertainment, the biggest comic book publisher in the world, hired the 34-year-old First Nations illustrator as one of the artists involved in Marvel Voice: Indigenous Voices #1 in August. THE CANADIAN PRESS/Jason Franson
VIDEO: Indigenous illustrator of new Marvel comic hopes Aboriginal women feel inspired

Kyle Charles says Indigenous women around the world have reached out

Prime Minister Justin Trudeau speak to the media about the COVID-19 virus outside Rideau Cottage in Ottawa, Friday, Nov. 20, 2020. THE CANADIAN PRESS/Adrian Wyld
Canada’s inability to manufacture vaccines in-house will delay distribution: Trudeau

First doses of COVID-19 vaccine expected in first few months of 2021, prime minister says

This undated photo issued by the University of Oxford shows of vial of coronavirus vaccine developed by AstraZeneca and Oxford University, in Oxford, England. Pharmaceutical company AstraZeneca said Monday Nov. 23, 2020, that late-stage trials showed its coronavirus vaccine was up to 90% effective, giving public health officials hope they may soon have access to a vaccine that is cheaper and easier to distribute than some of its rivals. (University of Oxford/John Cairns via AP)
VIDEO: How do the leading COVID vaccines differ? And what does that mean for Canada?

All three of the drug companies are incorporating novel techniques in developing their vaccines

Ilaria Rubino is shown in this undated handout image at University of Alberta. Alberta researcher Rubino has developed technology allowing mostly salt to kill pathogens in COVID-19 droplets as they land on a mask. THE CANADIAN PRESS/HO-University of Alberta
Alberta researcher gets award for COVID-19 mask innovation

The salt-coated mask is expected to be available commercially next year after regulatory approval.

Russ and Luanne Carl are sharing about their experiences of fighting COVID-19 this past summer. (Photo submitted)
Stettler couple opens up about COVID-19 battle

Luanne and Russ Carl urge others to bolster personal safety measures amidst ongoing pandemic

This 2019 photo provided by The ALS Association shows Pat Quinn. Quinn, a co-founder of the viral ice bucket challenge, died Sunday, Nov. 22, 2020, at the age of 37. (Scott Kauffman/The ALS Association via AP)
Co-founder of viral ALS Ice Bucket Challenge dies at 37

Pat Quinn was diagnosed with Lou Gehrig’s disease, also known as amyotrophic lateral sclerosis, in 2013

Minister of Justice and Attorney General of Canada David Lametti speaks with the media following party caucus in Ottawa, Tuesday, January 28, 2020. THE CANADIAN PRESS/Adrian Wyld
Exclusion of mental health as grounds for assisted death is likely temporary: Lametti

Senators also suggested the exclusion renders the bill unconstitutional

Claudio Mastronardi, Toronto branch manager at Carmichael Engineering, is photographed at the company’s offices in Mississauga, Ont., Thursday, Nov. 19, 2020. As indoor air quality becomes a major concern in places of business, HVAC companies are struggling to keep up with demand for high quality filtration systems. THE CANADIAN PRESS/Chris Young
Business is booming for HVAC companies as commercial buildings see pandemic upgrades

‘The demand right now is very high. People are putting their health and safety ahead of cost’

Prime Minister Justin Trudeau speak to the media about the COVID-19 virus outside Rideau Cottage in Ottawa, Friday, Nov. 20, 2020. THE CANADIAN PRESS/Adrian Wyld
Long-awaited federal rent subsidy program for businesses hurt by COVID-19 opens today

The new program will cover up to 65 per cent of rent or commercial mortgage interest

Most Read