Winnipeg Commodity Exchange Canola Futures Prices Dropped Sharply During May

Canola futures prices dropped sharply in very volatile trade during the month of May. The July futures contract closed at $363.80 per metric tonne on May 31 after trading as high as $448.30 as recently as April 4, 2004. The sharp canola price decline was part of a dramatic sell-off in the overall oilseeds complex, as the CBOT soybean futures have also seen tremendous selling since early spring. Reasons for the major price shift in soybean and canola futures included large commodity fund liquidation based on technical indicators, concerns about soybean and product imports into the United States, as well as rumors that Chinese demand for soybeans will slow down for the remainder of the crop year. Trade sources suggest that prices could remain volatile for the remainder of the crop year as the bearish factors weigh against bullish fundamentals, such as the record tightness in soybean stocks in the United States. Seasonal factors are expected to come into play as traders monitor the weather and its effects on the size of the new crop.

While all canola futures contracts have sold off sharply in the past two months, the drop in the new crop November 2004 contract was considerably less than the fall in the old-crop July 2004 futures contract. As a result there has been a significant decline in the old crop - new crop spread. The premium for the July contract over the November contract was as high as $59.80 on March 22 before falling sharply through to the end of May, to the point where the July contract and the November contract were trading roughly at par. Traders suggest that concerns about moisture levels in certain areas as well as the unusually cool temperatures have provided some mild support to the November contract.

The canola board crush margin has also fallen dramatically during the month of May. After peaking in late April at its highest level in several years, the board crush margin eroded sharply throughout the month, indicating that the declines in oilseed product futures (i.e. soybean oil and soybean meal) were even greater than the declines in canola seed