Tight canola supplies could perhaps cause ‘short squeeze’

Volatile ICE March canola punched above $700 briefly last week

Financial markets’ attention in the past week was diverted by a “short squeeze” on shares in GameStop, a chain of bricks-and-mortar video game stores such as this one in New York City’s Jackson Heights area, shown on Jan. 27.

The ICE Futures canola market went for a wild ride during the last week of January, hitting levels not seen in nearly 13 years before profit-taking took a bite out of the upside.

The nearby March contract rallied sharply for three straight sessions, eventually hitting a high for the move of $724.50 per tonne. The last time canola was priced above $700 was in March 2008. However, the downturn was equally sharp.

Attention in the financial markets during the week was on a ‘short squeeze’ on Texas-based video game retail chain GameStop and other companies, as small-time investors spurred on by social media posts sent the stock climbing higher and hedge funds betting heavily on the short side lost billions of dollars. The fund short positions meant that they expected share prices to drop, which would have net them a profit. However, co-ordinated buying on the other side allowed the group of retail investors to use the system to their advantage.

The fallout from the GameStop excitement remains to be seen, with stricter regulations on Wall Street already being discussed.

When canola was posting double-digit gains for three days in a row, some analysts also started talking about a ‘short squeeze’ in the oilseed. However, the situation was completely different than what was happening with GameStop. Fund traders are actually heavily long the canola market, according to data provided by the U.S. Commodity Futures Trading Commission. The shorts being squeezed in canola could have been commercial export companies with sales on the books, but that was also thought to be unlikely.

Farmers with unsold grain in their bins are long by definition. Ignoring other pricing strategies, farmers own the crop and will then close out that position when they sell. Meanwhile, line companies put sales on the books before they actually have ownership of the grain that will eventually move. That makes those exporters short. However, the commercial traders usually hedge their physical shorts by buying the futures. As a result, they typically only run into a short-squeeze situation when they can’t source grain from farmers and are forced to get it from their competitors on the futures market instead.

Canola exports continue to run well ahead of the previous year’s pace, causing the supply situation to tighten. That supply tightness could eventually lead to an actual short squeeze in canola, but for now any strength is more tied to the general bullishness of the market.

The looming South American harvest could weigh on oilseed markets over the next few months, with Chicago Board of Trade soybeans seeing a similar pattern as canola during the week. However, any issues with spring seeding when the North American growing season gets underway could be the spark that reignites another move higher in both canola and soybeans.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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