When I was 10 years old, my family lived for a year in a small community on the Labrador coast. Our house was halfway up the side of a hill and you could ride a sled from our front door down to the Atlantic Ocean, which was amazing for a Prairie boy like me.
The route took several twists and turns, and if you didn’t get enough speed at certain parts, you’d have to get up and walk to the next downhill section. The trek back took considerably longer.
As the snow piles up outside my Winnipeg window and the canola futures take a breather after falling to contract lows, I find myself remembering my days sledding in Labrador.
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The March canola contract hit a low of $610.20 per tonne on Jan. 9, having lost more than $100 over the past two months, before stabilizing and uncovering some support. Does that mean the lows are in for now and it’s time to start the slow climb higher? Or is the market simply pushing through a flat section before another drop?
There’s an argument to be made for both scenarios.
Option 1
Speculators are sitting on near record-large net short positions in canola and should be looking to take profits on those bearish bets by buying them back. The market was oversold by some metrics, while prices hit key reversal levels on the charts.
Crush margins remain wide, keeping domestic processors as active buyers, and there are ideas the price weakness could attract more export interest.
However, with exports through 23 weeks of 2.65 million tonnes – about a million tonnes behind the year-ago pace – there is plenty of slack and the ample supply situation leaves little reason to take prices higher without an outside catalyst.
At this time of year, the most likely supportive boost would come from South America, especially if there are any problems with soybean crops there.
Option 2
The $600 per tonne level likely provides a nice nearby psychological floor for canola, but a long-range weekly chart shows that sea level is still far away and a move back to $500 would not be out of the question.
Most analysts maintain that such a significant drop is unlikely, but without a bullish spark to trigger a round of short covering, the path of least resistance is pointed sideways to lower. After the contract low of $610.20 per tonne and the psychological $600 per tonne mark, there’s no significant technical support until around $560 per tonne.
Eventually the market will turn around and come back up for a cup of hot chocolate, but a continued period of tough sledding appears to be more likely – at least until we get closer to spring and attention returns to next year’s North American crops.