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China’s Tight-Money Policy Drags Down Commodities

Canola futures on the ICE Futures Canada trading platform maintained an upward price trend for much of the week before the Chinese government’s decision to keep a tight monetary policy sent world currencies into a frenzy and sparked a massive speculative sell-off of commodity positions.

The speculative liquidation essentially sent CBOT (Chicago Board of Trade) soybean and soyoil values down their daily trading limit on Friday, bringing canola down for the ride as well.

Steady export movement of canola off Canada’s West Coast, despite the absence of confirmed new sales in the futures market, provided the strong price base seen in canola earlier in the reporting period. Locals and speculative accounts were the ones seen adding to their long positions in canola, which served to further bolster values.

Profit-taking at the highs and overbought market conditions tempered the upside price potential in canola. The Canadian dollar’s move toward parity with the U.S. greenback also took some of the upward edge off canola’s advances.

Western barley futures actually experienced some trade during the week, but much of that was positioning by commercials.

CBOT soybean futures posted some significant advances during the early part of the week in view of the U.S. Department of Agriculture’s supply/demand balance sheets, which were released Nov. 9.

The key bullish feature for soybeans in the report was the U.S. government’s lowering of the yield estimate, which only served to lower this year’s U.S. soybean output. Continued strong demand from China for U.S. soybeans, combined with the smaller-than-expected production, also resulted in a tightening of the U.S. soybean supply situation.

Profit-taking, overbought price sentiment and an upturn in the value of the U.S. dollar helped to restrict some of the price gains seen in soybeans. Values on Friday (Nov. 12) were also pushed down by the Chinese government’s decision to tighten its monetary policy. The move was seen capping China’s strong demand for U.S. soybeans.

Corn futures at the CBOT suffered a price setback as the absence of fresh demand from the domestic and export sectors fuelled the selling. The USDA tightened up its U.S. corn supply situation as well, but the move had already been factored into the market by participants and had little impact. The losses in corn were helped along by the sell-off seen in U.S. wheat futures. The stronger Chinese currency also had bearish price implications for corn.

CBOT wheat futures posted some modest declines during the week as demand for the commodity continued to be absent. The unloading of positions by fund accounts was also evident and further undermined values. The China news also had sparked some aggressive selling.

Despite that price setback, the trend in oilseed values continues to look upward. In fact, prior to the China news there had been questions making the rounds: How high can canola futures go?

DON’S PLAYBOOK

After a quick survey of some analysts, and using an old playbook from my recently departed mentor, Don Bousquet, I’m willing to go out on a limb and say there is a good chance of canola futures again moving above the $700-per-tonne level.

Granted, the ability of canola futures to repeat the push to $769.50 as it did in March 2008, will require some major production problems somewhere in a major oilseed-growing region of the world. A few less decisions by China on their interest rate policies would also be helpful.

China’s astonishing demand for soybeans will continue to play a big role in the upward momentum for canola values, as will the steady climb in Western Canada’s canola crush capacity. The continued strong canola export pace from Canada was also seen adding further value. Also, believe it or not, canola in U.S. dollar terms is undervalued in comparison to U.S. soybean values, which leaves some room for some additional price strength, without soybeans having to move up as well.

But it will likely take a massive problem with the soybean crop in Brazil and Argentina to encourage values to push to that price level. A problem with Europe or China’s rapeseed crop also wouldn’t hurt the upward push.

There will also be a number of technical corrections in canola on the way up as well. There will be some resistance by the market to push canola above $600, but the push above that level will eventually come. The next point of resistance will be $650, but here too, if there is enough upward momentum, the next stop could be $700.

Again, when producers start to see these kind of values in the canola futures market, it’s only likely that the basis offered by the grain companies will widen.

As a result, the analysts were quick to point out that producers should pick some high price targets, and be willing to sell at least some quantities of canola at those values should those targets be achieved. Sound advice, and something I’m sure Don would agree with.

–Dwayne Klassen and Phil Franz-Warkentin write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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DWAYNE KLASSEN

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Forthree-times-dailymarket reportsfromCommodityNews Service,visitICEFutures Canadaupdates”at www.manitobacooperator.ca.

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