Broad commodity sell-off sweeps canola off perch

Recent upticks in COVID-19 cases have jarred outside markets

All good things will eventually come to an end — and it looks like that was the case in the canola futures market the last week of October.

The steady uptrend that was in place all through the summer and for most of the fall may have finally reached its upper limits, with the multi-year highs hit to start the week quickly giving way to a heavy bout of profit-taking. Soybean, corn and wheat futures in the U.S. also posted large losses and backed away from their own highs during the week.

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January canola hit a session high of $552.90 per tonne on Oct. 26, hitting levels not seen in more than three years. However, a broad profit-taking correction swept many financial and commodity markets two days later, taking the contract as low as $514 per tonne at one point. The actual losses were much more subdued by the close, but the damage was done from a chart standpoint and the $540- to $550-per-tonne area is likely to provide major resistance into the new year.

On the other side, nearby support comes in at $520, with $500 per tonne representing a major downside target.

The market may be entering a period of sideways consolidation now through the winter months, with the next opportunity for moving higher likely coming in the spring, when supplies start to show signs of dwindling ahead of seeding next year’s crop.

Both exporters and domestic crushers continue to show strong demand for canola. Total exports through the first 12 weeks of the 2020-21 crop year of 2.76 million tonnes are about 700,000 tonnes ahead of the previous year’s level. Domestic usage, at 2.4 million tonnes, is right in line with the 2.46 million tonnes processed in 2019-20.

While the harvest was generally favourable across the Prairies, there are ideas that actual production likely ended up below the 19.4 million tonnes forecast by Statistics Canada. If a smaller crop is proven true, ending stocks could end up below the 2.25 million tonnes projection from Agriculture and Agri-Food Canada.

The direct fundamental story for canola may be supportive, but plenty of outside factors will also come to play, with direction in the outside commodity and equity markets a key influence to watch.

The big wild card as the calendar turns to November is the U.S. presidential election. Regardless of who wins, markets have the potential to see some wild swings. In addition, any change to U.S.-China trade relations after the election is likely to provide some direction to the futures.

The ongoing COVID-19 pandemic is also only getting worse, with the impact of increasing lockdown measures around the world also a factor to keep an eye on.

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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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