Old-crop canola futures climbed higher at ICE Futures Canada during the week ended Feb. 8, hitting levels not seen since mid-September before running into profit-taking resistance to the upside. Dwindling stocks in Western Canada are the primary driver in the market, but canola is still only one oilseed among many in the broader market and looming South American soybean harvests have the potential to keep a lid on further advances.

Statistics Canada’s count of total Canadian canola stocks as of Dec. 31, 2012 came in at only 7.371 million tonnes, which compares with 9.646 million tonnes at the same time the previous year. The fact that supplies on Dec. 31 were over two million tonnes tighter than at the same point the previous year highlighted the need to ration demand going forward.

In the crop year to date, Canada has exported about 4.2 million tonnes of canola, according to the Canadian Grain Commission, and crushed 3.7 million tonnes domestically, according to the Canadian Oilseed Processors Association. Maintaining the current pace of usage would require two million extra tonnes of canola that just aren’t there this year. As a result, exports and the crush have no choice but to slow down.

In the short term, the scramble to meet commitments and secure supplies while they’re still available can be expected to keep canola prices well supported. However, it’s not all up up and away; there comes a point when no premium will be able to buy the product, because it’s just not there. There also comes a point where buyers stop paying up, because it’s no longer profitable. Where that point is with canola won’t be known until we get there, but it will come.

Second guessing

In the U.S., activity for most of the week centred on the U.S. Department of Agriculture’s monthly supply/demand report, with the pre-report positioning and post-report second guessing accounting for a fair chunk of the trade. Soybeans, corn and wheat were all lower overall, with only the oats market seeing any strength on the back of Canada’s tightening supply situation.

USDA’s report was finally released Friday morning, and didn’t fail to disappoint in providing a little excitement. The initial takeaway was bearish for soybeans, bullish for wheat, and relatively neutral for corn.

After holding steady for most of the week, soybeans dropped sharply on Friday after the release of USDA’s monthly report. Recent export demand from China had average trade guesses ahead of the report forecasting tighter U.S. soybean ending stocks, which was the case. However, world supplies were raised higher, with combined production out of Brazil and Argentina now forecast to increase by 28 per cent from last year. World soybean production for the year was pegged at a record 269.5 million tonnes, lessening any nearby supply concerns.

For wheat, U.S. carry-over at the end of the current crop year was projected at only 691 million bushels, which was down by 25 million bushels from USDA’s January estimate. Cheaper prices relative to corn in some cases were said to be diverting more U.S. wheat into the livestock sector. Wheat prices were still down for the most part during the week, as improving weather conditions across the U.S. Plains helped alleviate the drought concerns that continue to prop up values.

Chicago corn futures trended lower all week given a lack of demand from both exporters and the domestic ethanol sector. The USDA stocks report confirmed that poor demand, with U.S. corn ending stocks now forecast to be five per cent larger than they were in January, at 632 million bushels. World corn ending stocks were also up by about two million tonnes from the last estimate.

With the stocks report out of the way, South American weather reports could be major market movers. Soybean and corn harvests will progress in Brazil and Argentina over the next couple of months, and any weather conditions deemed detrimental to crop development or harvest progress will be deemed bullish for the futures. On the other side, if the weather is good for the crops, prices will inevitably come under pressure.