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Domestic and export demand support canola

Guided by bullish chart signals, speculators are adding to their long positions

ICE canola futures kept climbing during the week ended Nov. 20, hitting multi-year highs and showing no signs of slowing the uptrend.

Aside from a brief blip on the charts in 2017, when the July contract was expiring, the nearby canola market has not traded above $550 per tonne for any extended period of time since 2013. January canola first settled above that key chart point on Nov. 10 and has not looked back as it climbed above $575 10 days later.

Bullish chart signals should keep speculators adding to long positions while the trend remains in place, although technical indicators were starting to show signs of entering overbought territory.

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The strength in canola is not only technical, though, with active commercial demand in the cash market another driver. Exports are running well ahead of the year-ago pace, while domestic crushers are also processing at a solid pace.

Crush margins have increased by about $40 per tonne over the past month, with current levels showing profits of about $125 per tonne. Those large margins imply that canola seed has room to the upside, but at the same time the crushers are likely unwilling to pass much of those profits on to producers.

Farmers sold what they needed for cash flow at harvest time, and now may be showing some restraint on future sales. As a result, end-users are being forced to pay up for nearby delivery, causing the front months to rise above the more deferred positions.

There’s also an underlying sentiment in the markets that supplies may get tight and need to be rationed before the 2021 crop becomes available.

South American weather concerns are key to that tightening-supplies storyline, with dryness in key soybean-growing regions there cutting into production prospects.

Some Brazilian farmers have replanted their soybeans three times by now, and the harvest will likely be pushed back. As a result, China is front loading its soybean purchases from the U.S., propping up Chicago futures and providing spillover support for canola.

Soybeans also moved to multi-year highs during the week, and could soon top US$12 per bushel. A move to that point would likely uncover a fair bit of farmer selling, but if South America remains dry, “beans in the teens” may not be that far fetched.

Corn and wheat also moved higher during the week, although the advances in the grains were much more subdued.

In addition to the weather situation in South America, the grains and oilseed markets are also keeping a close eye on COVID-19 vaccine developments, as any optimism on that front causes volatility in the financial and energy sectors.

About the author

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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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