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Wednesday, May 28, 2014

ICE now more attractive Canola hedge but Matif more certain

By Angus Brown  |  Source: ICE, Matif, Trade

Key points

  • Matif Rapeseed swaps have fallen $35 since March, while ICE swaps have been steady.
  • Local new season prices are following Matif closely, with little relationship to ICE.
  • The narrowing of the Matif/ICE spread means that ICE can now be used with more confidence to hedge Canola prices, although Matif will give more price certainty.


2014-05-27 ICE Now More Attractive Canola Hedge But Matif More Certain FIG 1

2014-05-27 ICE Now More Attractive Canola Hedge But Matif More Certain FIG 2

Back in March, we looked at hedging new season Canola prices, and identified that Matif (French) Rapeseed was a better hedging option than ICE (Canadian) Canola. This article updates that analysis and looks at where we should be hedging Canola now, if at all, given that the wheat window is quickly closing.

Generally, we like to think the Canola hedging window is open right through to August, with northern hemisphere spring oilseed crops currently being planted, and plenty of time for issues to arise with the crop and create price volatility.

Since our last article in March, the new season Matif Rapeseed price has fallen 8 Euro, while the Australian dollar has gained a cent and a half versus the Euro. The net result of this is that swap prices have fallen from $A570/t to $535/t (figure 1, noting that the heavy fall in the Matif price is rolling over from old season contract to new season).  ICE Canola in our terms has been relatively flat over the same period, within a $20 range, but is today at $485/t, the same price as in March.

As expected, the spread between the new season Matif and ICE prices in our terms has narrowed from $85 to $48/t.  Over the same period, new season forward contract prices have also fallen, down $30/t, having followed the Matif price lower: they are now priced around $505/t. 

Growers who hedged on Matif in March have an expected price of $540/t, as they have gained from the fall in prices. Those who were hedged on ICE haven’t lost anything, but also haven’t gained despite the forward contract price easing.

With the ICE and Matif spread now back in the historical range, it makes using ICE swaps now more attractive than back in March.  New season local Canola basis is now back at $18 (figure 2). While this is higher than most harvests over the last six years, we could also see basis head higher if Canada grows a big crop and demand from Europe remains strong.

Hedging Canola using ICE swaps at $485/t should give a harvest price of $495-530/t at port, depending on basis. However, given the close relationship of our prices to Matif over the last 6 months, hedging on that contract is likely to give a more certain, if not a better, result.     

What does this mean?

So if our prices are following Matif more closely than ICE, while would we hedge on ICE?  Good question.

Historically Matif has rarely been priced below ICE Canola, with the largest premium being $158/t earlier this year.  Assuming our local basis to Matif holds at negative $30-40/t, if Canola supplies are tight in Canada, and abundant in Europe, hedging on ICE at $485 could give a net local Canola price of $450/t.  If we see a big Canadian crop, and tight supplies in Europe, this could give a net local Canola price of $585/t.

This is opposed to hedging on Matif at $535/t, which gives an expected local Canola price in a much smaller range of $495-515/t.  Our preference for the risk averse grower is to hedge on Matif, but there is only one bank offering Matif swaps. Moreover, unless you have a futures account you’ll have to hedge your Canola on ICE:while the result is less certain, the value is much better than back in March.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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