Brent Futz, The Spread Trader is back this week.
The Canola Conundrum
Chart 1 is a graph of the July’26/Nov’26 canola spread over the past 6 months.
The shift in orientation from a backwardation configuration of $17 in March to a contango orientation of $-11.00 at present marks a $28.00 change in the spread.
In terms of a transfer of wealth between the perpetual long and the perpetual short, it translates into a $95M advantage for the short.
The contango orientation results in the long increasing the average price of its long position and the perpetual short increasing the average price of its short position – advantage goes to the short.
Chart 1; July’26/Nov’26 Canola Futures Spread
Note that the spread peaked in March before reaching a temporary bottom during the middle of April which corresponds with the liquidation of the May contract.
The most recent decline to an $11 contango configuration coincides with the anticipated liquidation of the July.
Chart 2 is a graph of the Nov’26 futures contract over the same time period.
The move to contract highs corresponds with the change in the orientation of the July/Nov spread from backwardation to contango.
Chart 2; Nov ‘26 Canola Futures
The change in the orientation of July 26/Nov’26 spread from backwardation to contango has had a couple of effects.
Firstly, it has resulted in a significant transfer of wealth from the perpetual long to the perpetual short.
Secondly, the contract highs made in the Nov has resulted in attractive new crop prices for producers.
It should be understood that the rally in the Nov is not a demand driven rally; it should be considered a temporary event that will track the liquidation of the July contract.
The pending liquidation of the July contract and the July/Nov spread was predictable.
Given that the majority of the July open interest will not stand for delivery, the long will be forced to roll their position currently at a contango.
The large open interest of the long ahead of liquidation is indicative of a passive approach or strategy by the perpetual long.
A comprehensive strategy by perpetual participants is required order to avoid a negative transfer of wealth that is implicit with all futures contract spreads.
The evolution of the July/Nov spread is a example of a spread influencing both technical and fundamental strategies moving forward.
Any trading strategy should be complemented by an understanding of futures spreads.
Life’s Good
I enjoy discussing the markets.
Reach out to me with any questions:
Trent Klarenbach
306-463-8607
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Nothing written, expressed, or implied here should be considered investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own due diligence.
