Canola markets see upside in July

Canola at six-month highs, but upside may be limited

The ICE futures canola market trended higher for all of July and hit its best levels in six months ahead of the calendar flipping to August. However, with the harvest just around the corner, farmer selling may put a damper on the upside.

One good news story for canola over the past few months has been the increased demand from Europe, which has imported nearly two million tonnes of canola during the 11 months of the 2019-20 crop year to date. That’s up fourfold on the year and has helped total exports run ahead of the year-ago pace, despite lost business to China.

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As much of the canola destined for China is moving through Thunder Bay, rather than the West Coast, it has also had the added influence on the market of underpinning Manitoba canola bids a bit more than normal.

Aside from the commercial demand, fund traders accounted for much of the strength in canola futures over the month as they whittled away their bearish short positions and put on long positions. The net fund short was at its smallest level in nearly two years in the latest Commitment of Traders report from the Commodity Futures Trading Commission and was on pace to flipping over to a net long.

Gains in Chicago Board of Trade soybeans contributed to the strength in canola, with the managed money fund traders already holding more longs than shorts for the past few months. However, canola has been outpacing its United States counterpart to the upside, and may be due for a correction.

The November canola contract has climbed well above both the short-term 20-day moving average and the longer-term 200-day moving average, with the relative strength index in oversold territory.

Trading around C$490 per tonne at the end of July, a test of the January highs around C$500 per tonne, is still possible before seasonal harvest pressure materializes — although that would likely take an outside catalyst, such as a rally in the soy complex. Meanwhile, a retreat back down to the 200-day moving average around C$481 per tonne may be more likely, especially if weather conditions remain relatively favourable.

North American weather conditions over the next month will be a major market moving factor in all of the grains and oilseeds, as crops continue to develop and harvest operations soon get underway.

Midwestern weather remains relatively favourable for soybeans and corn, with the good-to-excellent ratings from the U.S. Department of Agriculture improving to 72 per cent for both crops as of July 26.

U.S.-China trade relations and general economic sentiment amid the ongoing pandemic will also be followed closely, and could distract from the fundamental weather-related trade on occasion.

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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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