Canola open interest at record high on ICE Canada

(Resource News International) — Open interest in ICE Futures Canada’s November canola future is currently at record highs for a single contract month, and there are ideas that this level of open contracts will remain high for some time to come, according to market participants.

On June 29, open interest in the November canola future hit 129,462 contracts, surpassing the previous record for a single month when the January 2008 canola future hit 108,332 contracts on Nov. 23, 2007, according to the Winnipeg-based exchange.

The total amount of open interest in the canola futures market is shy of the 183,650 record from March 5, 2008. Tuesday, the total open interest was around 154,360 contracts.  

June has been an active month for ICE canola futures. A record trading day was set on June 9, with 49,015 contracts traded, and an all-time volume record for one month will be set when markets close Wednesday, according to Brad Vannan, president and chief operating officer at ICE Futures Canada.

“It’s been a good month,” he said.

“I think there’s been a worldwide interest in the size of the Canadian crop, because Canada represents such a high volume of the total supply of canola for export,” said Vannan.

According to Ken Ball, a broker with Union Securities, it is typical to see an increase in the open interest in the futures market this time of year due to the surfacing of new crop. However, this year the open interest has been exceptionally high compared to the norm.

“Probably a bigger buildup than normal because of the issues building on the (Canadian) Prairies since late May,” said Ball.

Wet weather conditions across Canada’s grainbelt left a large and unexpected number of acres unplanted. Continued unfavourable conditions have started affecting yield potentials, a loss still to be determined.

“We are talking about a humongous reduced Canada production number, which reflects the high open interest in November,” said a senior analyst, who asked not to be identified.

The reduced production expected for the 2010-11 crop year has pushed producers to withhold selling old-crop stocks to cover their pre-sold contracts, market watchers said.

“With all the problems on the Prairies, growers have stopped selling and committing further forward because they don’t know what kind of a crop they’re going to have,” explained Ball. “The commercials are forced to come into the futures market to fulfill their commitments to make sure they’ve locked in their value because farmers aren’t giving it to them in the field.”

However, domestic crushers and grain companies had previously bought positions, anticipating the old crop to be available within the market by now.

“Just holding”

The lack of producer selling has driven traders to buy out their July contracts and move into the November in order to give themselves time, according to a senior analyst. The result is a higher open interest in the November contract, as investors are going long the market hoping producers will sell their old-crop stocks.

“So that definitely contributes to a buildup in open interest, when you have traders who are buying and just holding. They’re just sitting on their position opposed to buying and selling,” said Ball.

But analysts don’t think producer selling will start to increase anytime soon, as the damage done by the weather across the Canadian grainbelt is too extensive. Some market participants think the open interest rates will stay high until January 2012.

“These numbers are not going down. These numbers will stay where they are right now,” said the senior analyst.

“And, I think these numbers will stay at these levels until the beginning of 2012, because this won’t straighten itself out until the harvest is completed next year.”

Other factors will keep the open interest rates high as well, according to Ball. When open interest rates are high more participants join the market, causing them to increase more.

Also, speculators and commercials will be buying long-term positions, keeping open-interest rates buoyed.

“The combination of more speculative interest, holding long positions, not liquidating them in the short term, and increased commercial commitments in canola” will keep open-interest rates higher, said Ball.

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