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Canola ending stocks still support futures

A seasonal slowdown could be expected in coming months

The ICE Futures canola market saw some large price swings during the second week of February, although the general path of least resistance remained pointed higher as many months set fresh contract highs. The concerns over tightening supplies that have propped up the canola market for months now remained supportive, although a seasonal slowdown could be expected over the next few months.

Fresh news during the week came in the form of the monthly supply/demand estimates from the U.S. Department of Agriculture, released Feb. 9. USDA lowered its projections for both U.S. soybean and corn ending stocks for the current crop year, to 120 million bushels and 1.5 billion bushels respectively. The soybean number was in line with expectations, but the corn carry-out triggered a bearish reaction in the futures as pre-report expectations had been for tighter supplies.

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USDA left its estimates on South American production unchanged on the month, which came as a slight surprise after fields there dealt with dryness through the growing season and then excess moisture just as the harvest gets underway. The logistics and weather in South America mean grain and oilseeds there don’t store the same as in cold North America. Rather, recently harvested soybeans and corn move into export channels fairly quickly, which means an influx of South American soybeans over the next few months should put a cap on the global oilseed markets, no matter how large the production in the end.

As a result, canola futures could also be expected to stabilize over the next few months in sympathy with the soy market, with the next possible catalyst for another move higher coming at seeding time in the spring.

The most active May contract was trading just under the $700-per-tonne mark by Feb. 12, which are levels only really seen once before in history. That said, relativity will be the key when it comes to pricing. While canola may be at historically high price levels, it remains attractively priced relative to other options.

That relativity could be supportive on a move up, but also on the way down. Speculators are holding large net long positions in canola, and will eventually liquidate those positions and book profits. However, the speculative money flows won’t change the underlying fundamentals of solid end-user demand and tightening supplies.

The latest Canadian Grain Commission data showed Canada has now exported 6.37 million tonnes of canola through the first 27 weeks of the 2020-21 crop year. That’s up by about 1.7 million tonnes from the same time the previous year. Visible supplies in the commercial pipeline remain more than sufficient to meet the demand, but the pace is unsustainable and a time will eventually come when the cupboards empty.

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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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