Winnipeg Commodity Exchange: Canola Futures Prices Rallied In August

Canola futures prices rallied sharply during August with the November contract rising nearly $50.00 per metric tonne during the month to close at $374.20. A November contract closing price low of $321.20 was established on August 4 before concerns about growing conditions and potential frost damage helped provide some price support. The price increases gained momentum in mid-month once frost was actually reported in parts of Saskatchewan and Manitoba, including a one-day gain in the November contract of $22.80 per tonne on August 23. Also providing support to canola prices was strength in the CBOT November soybean futures price during the latter half of the month. Traders anticipate that prices will likely remain quite volatile for the next few months as the market deals with uncertainty over the extent of frost damage and the ability of the canola crop to reach maturity. In spite of the strong August rally, the November contract is still over $30.00 per tonne below the contract high of $407.70 set in early May.

While both WCE canola prices and CBOT soybean prices have appreciated during the month of August, WCE canola prices have increased at a faster pace. As a result, the nearby WCE canola - CBOT soybean spread has increased to a $67.53 per metric tonne premium at month end, the highest premium seen since July 2003. As recently as May 2004 WCE canola traded at a discount that exceeded $100 per metric tonne to CBOT soybeans, a time when a severe shortage of soybeans was anticipated in the United States while Canadian canola supplies were viewed as being sufficient. Due to the size of the current premium for canola futures, trade sources suggest that in spite of concerns about weather damage reducing the size of the canola crop, continued increases in WCE canola prices may be somewhat dependent on price increases in the CBOT soy complex.

The canola board crush margin for new crop canola and soybean oil and meal has dropped considerably from its late winter peak as a result of WCE canola seed prices outpacing gains in CBOT soybean oil and soybean meal prices, (see Chart 3). After spending most of the year trading considerably higher, current margins have fallen to the point where they are similar to the margin at this time last year. New crop board crush margins measure the November WCE canola futures price against the December CBOT soybean oil and soybean meal prices.