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Bullish Grain Market Tone Continues Into The New Year

Canola contracts traded on the ICE Futures Canada platform moved higher during the thin Christmas/New Year’s period, as many participants moved to the sidelines. Farmers had generally shut their bins ahead of the new tax season, helping exaggerate the upward move. Dryness in Argentina, bullish technicals, steady domestic crusher demand, and a rally in CBOT soybeans all provided some underlying support to the Canadian market.

In the U.S., soybeans, corn and wheat all moved higher during the final weeks of 2010 as well, finding some direction from the weather issues in South America and Australia.

North American grain and oilseed prices are trading at their highest levels in over two years in the first days of 2011. While “what goes up will inevitably go down,” for

now many of those bullish factors that took prices higher in 2010 are still there underpinning the agriculture markets.

Weather was a dominant theme of 2010, from flooding in Canada and Australia, to drought in Russia and South America, and even a volcano in Iceland that sent ash up into the atmosphere. The weather always has the potential to be a wild card in the grain markets, but the after-effects of the adverse 2010 conditions will still be felt for some time.

Here in Canada the excess moisture that was the bane of many producers in 2010 will still be causing problems when it comes time to plant the 2011 crops. Fields are saturated and flooding is a possibility once again.

Until spring comes to the Northern Hemisphere, most of the weather-related news will be coming out of South America, where their crops are currently growing. Dryness in Argentina has supported grains and oilseeds prices recently, and traders will continue to watch for any signs of stress on the developing soybeans and corn.

Australia, meanwhile, continues to be plagued by heavy rains in some cropping areas.

On the demand side, a factor to watch in the upcoming year will be China, and how much it is buying. In recent years the country has shown a seemingly insatiable demand for grains and oilseeds, but has also proven to be a wild card on more than one occasion, such as last year when it placed restrictions on Canadian canola infected with blackleg.

DOMESTIC CRUSH INCREASE

Domestically, Canada has a larger canola crush capacity at the start of 2011, with a number of new projects having come online over the past year. The crushers continue to see some good margins, and will be doing their best to use up that extra capacity.

Global economic issues had an underlying role in the grain markets over the past year, and will likely do the same in 2011. Improving economic sentiment translates into increased demand for commodities, such as grains and oilseeds. However, the economic recovery has been slow in coming to some parts of the world, and ongoing problems in Europe, Asia, and the U.S. could easily sway the speculators in the agricultural markets as well.

Currency fluctuations and interest rates also come to play in the prices seen at the farm level. The Canadian dollar is above parity with its U.S. counterpart at the start of the new year. A stronger Canadian dollar makes the country’s commodities less attractive to export customers. However, a stronger Canadian dollar, often means a weaker U.S. dollar, which will be making U.S. grains and oilseeds more attractively priced to exporters.

Technical signals will also be important to watch going forward, as speculators become larger and larger players in the grain and oilseed markets. The charts in all the major grains and oilseeds were trending higher at the close of 2010, but are also looking vulnerable to some profit-taking. The funds have become bigger players in the agricultural markets in recent years in an effort to diversify their positions, but the grains and oilseeds still make up a very small portion of their overall holdings and what may seem as a minor adjustment to them, could lead to larger price swings in the futures.

Looking ahead, 2011 will come with its own challenges, but many of the issues making the news in 2010 should continue to move the grain markets going forward.

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Forthree-times-dailymarket reportsfromCommodityNews Service,visitICEFutures Canadaupdates”at www.manitobacooperator.ca.

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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