Canola still pointed higher despite harvest pressure

Canola futures on the ICE Futures Canada platform bounced around near the top end of their recent range during the week ended Sept. 7, finishing with modest gains overall, as concerns that the Canadian crop may not be as large as initial expectations provided support. Ideas that canola was underpriced compared to other oilseed markets, particularly soybeans, were also supportive.

Canola harvest operations in Manitoba are nearing completion, while producers in Saskatchewan and Alberta approach the halfway point. The influx of newly harvested canola does have the potential to limit the upside in the near term. However, the demand is showing no signs of slowing down either, with a large export program said to be on the books this fall.

The Canadian dollar climbed to its strongest level relative to its U.S. counterpart in over a year during the week. A loonie that’s worth more than a U.S. dollar bodes well for any cross-border shopping expeditions in the works, but the stronger currency cuts into crush margins here at home and also makes Canadian commodities less attractive to foreign buyers — who do all of their pricing in U.S. currency.

In any case, the general consensus these days is that harvest pressure could slow the upward trend in canola over the next month or two, but the overall outlook remains pointed higher, given strong demand and the likelihood of a tight supply/demand balance.

Statistics Canada reported canola ending stocks for the recently finished 2011-12 crop year at only 788,000 tonnes. That’s well below the revised 2.2 million tonnes left over from the previous year. A number below a million tonnes is generally thought to be very tight for the canola market these days, and with actual production this year likely below the optimistic 15.4 million tonnes predicted by StatsCan in late August, some end-users may be forced to ration their demand.

Looking at the charts, the November canola contract ran into serious resistance at the $645-per-tonne level during the week. A break above that could set the stage for a move towards the $690 level, or beyond, as far as the technicals are concerned. However, a corrective move back toward the $600-per-tonne level seems more likely in the near term, barring a weather scare or other market-moving news.

Canola can also be expected to continue to take its cues from the CBOT (Chicago Board of Trade) soy market, which also traded near the top end of its recent range during the week on the back of uncertain yield prospects. However, the most active soybean contracts all ran into profit-taking and were down on the week.

The soy crop is still some time away from being harvested, and persistent concerns over hot, dry conditions cutting the yield potential of the U.S. crop accounted for some of the buying interest. However, at the same time, there were also ideas circulating that the soy crop may not be as bad off as originally feared, as timely rains later in the growing season likely helped yields in some cases.

The U.S. Department of Agriculture releases updated supply/demand data of its own on Sept. 12, and whatever the numbers show will likely dictate what happens in the futures — at least in the short term.

The corn numbers will be watched the closest, as traders will be looking for confirmation on just how bad yields were hurt by this year’s drought.

Wheat futures in the U.S. moved higher during the week, with most of that strength tied to production concerns elsewhere in the world, including the Black Sea region and Australia.

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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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