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Canola Rally Lagging, More Strength To Come?

For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at www.manitobacooperator.ca

Grain and oi l s e e d prices at ICE Futures Canada in Winnipeg closed the week ended Oct. 16 higher, with canola lifted by the strength in the Chicago soybean market. Harvesting delays, due to weather, and slower farmer selling gave support. However, the advances were slowed by better conditions for harvest forecast for this week, and firm cash basis levels that have attracted in farmer selling. The firm tone in the Canadian dollar also weighed on the market.

Western barley was little changed amid a lack of strong interest. The firm tone in the U. S. corn market gave some support but was offset by the strength of the Canadian dollar and only lacklustre demand.

Chicago corn and soybean markets rallied during the week as cold and wet conditions halted crop development and stopped any harvesting activity as well. A weak U. S. dollar also gave support, as did some technical signals which caused speculators to turn into buyers after being sellers for the past month.

U. S. wheat futures posted good gains in all three futures markets, with some buying linked to the corn and soybean rally and some buying prompted by the weak U. S. dollar. Iraq picked up some U. S. wheat during the week and that was positive. Friendly technical signals caused some speculative buying early in the week. However, offsetting that was the ample global wheat supply and the continued perception that U. S. wheat is overpriced.

SOY TRUMPS CANOLA

Canola prices have staged a moderate rally in the past two weeks with gains of about $30 per tonne from the bottom to the top. During the same time frame, the U. S. soybean market rallied US$1.32 per bushel. Stated another way, the canola market rallied 8.24 per cent while the soybean market rallied 14.95 per cent.

Why didn’t canola equal the U. S. market gains? Are more canola gains to come? The conventional wisdom is that the high-flying Canadian dollar trimmed the sails of the canola market. However, the Canadian dollar rallied only 3.2 per cent during the same time frame. This still means that the U. S. soybean market saw a much larger advance than the Canadian canola market.

Some of the blame goes on the finding of salmonella in canola meal shipments to the U. S., which has reduced the crush pace to just 63 per cent of capacity.

Some also say the sluggish pace of export bookings has caused some of Canadian rally to be more anemic than the U. S. rally. However, the canola movement into export channels in September and October certainly suggests a relatively fast pace.

As a result, many analysts feel the canola rally is much poorer than it should be and that canola will still catch up to the U. S. market. The expectation is that we will see canola challenge the

$400-per-tonne level on the futures and may see it rally as high as $425 before dropping back.

The longer term for the market is actually quite favour-able, despite the salmonella problems with canola meal. I am still looking for the annual domestic usage to hit 5.3 million tonnes as new crushing plants at Yorkton, Sask. come online.

Exports are only going to be limited by the availability of canola. It looks like we will be exporting about 6.5 million tonnes, down from 7.9 million last year, simply due to the smaller crop.

The question then becomes, “How large is the crop?” The trade continues to feel production will hit 11 million tonnes, following the crop-saving weather of September. With ending stocks in 2008-09 being 1.66 million tonnes, the total available supply will be 12.66 million tonnes.

Consumption is expected to be 11.8 million tonnes. This means ending stocks of canola in 2009-10 will be about 800,000 tonnes. This could be lower if exports are stronger. At this level of ending stocks, the pressure in the canola market will be for prices to move higher.

The question then becomes the U. S. soybean crop and price direction in that market. The U. S. Department of Agriculture’s recent production estimate of 3.25 billion bushels is now felt to be the high for the year and the poor weather we have seen will cut the crop size, although not by a lot. The big problem for the U. S. soybean crop was not so much the cold conditions of October, but disease, which has lowered yield.

Based on record exports, estimated by USDA at 1.305 billion bushels, U. S. 2009-10 soybean ending stocks are expected to be 230 million bushels. This is not a burdensome number. Any drop in the U. S. crop size will come off this ending stocks number and pull the market closer and closer to the more critical ending stocks level of 200 million bushels.

This will supply a positive backdrop to the canola market for the winter and early spring. Weighing on the canola and soybean markets as the winter advances will be the record-large production of soybeans expected in South America. The world will be counting on this crop to recharge global soybean stocks and any weather threats to it will cause extremely volatile markets and likely give you some 2010 pricing opportunities.

We should see canola futures above the $400-pertonne level in the winter, with the market likely to touch the $450 level during any unusual demand. This also assumes that the U. S. soybean crop rallies back to the $10/bu. level in the early winter as exports absorb the big crop.

Assuming South America gets off a big crop, then look for later-winter and early-spring prices to be poorer, with canola back to the $390-$400-per-tonne level and the U. S. soy market possibly as low as $9/bu.

CORN SEEN RISING

There will be a spring rally in 2010, though, to encourage canola and soybean acres. Everything looks like U. S. corn will see a very strong year and that corn prices are likely to be back to the $4/bu. level. This will help to hold soybeans in the $9.50 to $10/bu. area in order to keep acres from dropping. It will likely pull canola into the $425-pertonne level in the spring in order to get acres.

The strength of the Canadian dollar could take the bloom off a canola rally. However, I feel the scenario I have suggested would take place even if the Canadian dollar reaches and holds at parity.

Another situation to watch is the crude oil market. The last time canola hit record highs came on record-high prices in crude oil. Should we see any exceptional rally in crude oil it will translate into strong support for canola.

– Don Bousquet is a well-known market analyst

and president of Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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