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Canola Outpacing Soybeans

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Canola contracts traded on the ICE Futures Canada platform managed to move higher during the week ended Feb. 5, but not before setting fresh contract lows to start the week. The downtrend over most of January finally persuaded farmers to move to the sidelines, and that lack of hedge pressure, coupled with the need for a technical correction higher, helped canola values see some improvement. Talk of fresh export demand, and the weaker tone in the Canadian dollar, were also supportive. Western barley prices were narrowly mixed during the week, although trade was very thin and that futures market seems to be coming less and less relevant compared to the cash market.

In Chicago, soybeans were mixed, as the products went in opposite directions, with soymeal lower and soyoil higher. Corn was down on the week, pressured by the strong U. S. dollar. The large South American crops that will soon be dominating the global export trade weighed on both soybeans and corn, and should continue to do so. By the time this article goes to print, the U. S. Department of Agriculture will have released its latest supply/demand tables, on Feb. 9. Barring a surprise, the reports are expected to consist of only minor adjustments to the large U. S. corn and soybean supply situation, but should also include upward revisions to South American crop estimates.

U. S. wheat futures were mixed during the week. Kansas City futures were down, while the spring wheat contracts in Minneapolis moved higher. In Chicago prices bounced around, with the nearby months edging lower, but the more deferred positions seeing gains. Export demand for U. S. wheat remains sluggish, especially as the strengthening U. S. dollar made U. S. wheat prices even more expensive in the international market. Once again, barring a surprise, the new USDA reports will likely have confirmed the burdensome U. S. supply situation once again.

INDEPENDENCE IN CANOLA

The relative size of the canola market means that the commodity often takes the backseat to developments in the U. S., and this will likely be the case again as traders on both sides of the border take stock of the latest USDA numbers. However, there are still some factors at play in the canola market itself, as shown by how the Canadian market outpaced soybeans over the past week.

Looking at the charts for soybeans and canola, a case can be made that soybeans are still trending downward, despite attempts at short-covering bounces, while canola has already turned the corner higher.

Reading too much into the technical signals can be a shifty science at best, but it’s worth noting that the large fund traders, with the deep pockets, do take a lot of their cues from those patterns.

Beyond the technicals, I think there may be other reasons for some independent strength in canola, or if not strength, at least stability.

There’s no shortage of feed grains around the world right now, which cuts into the demand for soymeal and canola meal. However, the demand for vegetable oil is still strong – and growing, according to some analysts. Canola has a much higher oil content compared to soybeans, making the commodity more attractive to those buyers looking for oil over meal. While that may not necessarily translate into a rally for canola, it should help prices hold steady even if soybeans do continue to deteriorate.

The canola export pace remains surprisingly strong, and at 3.46 million tonnes exported to date is only one good-size shipment behind the previous year’s pace. That’s despite the ongoing restrictions on moving canola to China. One interesting point to note is that the demand is still there from China, it’s just being met in a round-about fashion. Export sources have said that a good portion of the canola exports are going to destinations such as Dubai, where the seed is crushed and the resulting oil still ends up in China.

If Canadian exporters can continue finding homes for the seed in other markets aside from China, the supply situation will likely not be as burdensome as some had feared. With more domestic processing capacity also coming online, prices will eventually need to be high enough to attract enough acres into the crop this spring.

CHEWING THROUGH SUPPLIES

Statistics Canada released its latest grain and oilseed stocks report on Feb. 5. Canola supplies in all positions, as of Dec. 31, were pegged at 8.762 million tonnes. While that was at the high end of trade expectations, it was still down from the 9.15 million tonnes in the country at the same point the previous year. The report was seen as confirmation of the production numbers put out by StatsCan in December.

The general sense among market participants, in response to the report, was that the industry was doing a good job in chewing through the supplies. The latest Agriculture and Agri-Food Canada supply/demand estimates, released Jan. 28, would echo that sentiment, as the market analysts there foresee canola ending stocks declining to 800,000 tonnes by the close of the 2009-10 crop year, from 1.65 million at the start of the year.

However, to do that, buyers will need to keep making it worthwhile for farmers to deliver into the system. That could present some basis opportunities going forward, especially closer to spring when the need to ensure acres for next year becomes more important.

– Phil Franz-Warkentin and Dwayne Klassen write for Resource News International (RNI), a Winnipeg company

specializing in grain and commodity market reporting.

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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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