Canola contracts traded on the ICE Futures Canada platform hit fresh contract highs yet again during the week ended Jan. 21, as the underlying technicals and fundamentals continue to point higher.
It’s the same old story in canola as it’s been for the past couple of months. End-user demand is strong, supplies are tightening and just about everyone is bullish. Farmers don’t want to sell if they don’t have to, especially with so many signals pointing higher. A correction is inevitable, and when it comes, the drop could be sharp. However, in the meantime, why knock a good thing?
While Canadian production was down on the year, weekly Canadian Grain Commission data show the export pace is right in line with the level in 2009-10, while the domestic crush is far surpassing the year-ago level. As of Jan. 16, Canada had exported just under 3.3 million tonnes of canola during the crop year to date,
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which compares with 3.25 million at the same point the previous year. The domestic crush of 2.6 million compares with 1.9 million a year ago. All that translates into tightening stocks, which bodes well for prices.
On the technical side, the March canola contract hit an intra-session high of $608.60 on Jan. 19. The large speculative funds continue to be bullish, according to market participants who said the eventual upward target could be anywhere from $650 to $700, depending on how long the funds keep buying. However, that speculative money is tied to activity in the outside financial and commodity markets, with the flows into canola dictated by what happens elsewhere.
Corn and wheat in the U.S. also moved up during the week, but soybeans ended mixed. The nearby months in soybeans came under some pressure as crop conditions improved in Argentina. The more deferred positions were stronger, though, as the fight for acres between corn and beans heats up heading into the spring.
A visit by Chinese President Hu Jintao to the U.S. during the week included the signing of an agreement that would see U.S. soybean sales to the country to the tune of US$1.8 billion. As some analysts have pointed out, the agreement is only a piece of paper, but it does put an official stamp on the expectations for continued strong soybean exports.
Wheat posted the largest advances in the U.S., as export demand and global weather concerns in a number of key wheat-producing regions came to the forefront. Canada’s higher-than-normal proportion of feed-quality wheat is playing a part in that supply tightness, although some of that lower-quality wheat will be blended to find its way into food markets.
The political unrest in Tunisia, brought on by rising food costs in the North African country, also accounted for some of the demand in wheat as other buyers in the region look to secure supplies from the ever-dwindling global pot.
A report put out by the International Grains Council during the week forecast that the strength of the global wheat market would lead to an increase in area of about three per cent in 2011-12. Assuming average yields, that would see production around the world increase to 670 million tonnes, from 647 million.
Canadian wheat production can only do better on the year, at least if the weather co-operates. However, the acreage situation may not increase to the same extent as the global projections, as other crops can generate more cash, more quickly.
Price comparisons put out by the Saskatchewan government show canola as the clear winner as far as profitability is concerned, with flax, lentils and canaryseed also coming in above spring wheat. In Manitoba, soybeans and corn also look like good cropping options at this early stage, at least in the Red River Valley.
Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.