Don’t Cry For Argentina Just Yet

ICE Futures Canada canola contracts climbed to fresh contract highs during the week ended Jan. 14, but ran into speculative profit-taking and farmer hedges to the upside, which tempered the advances. While corrections are to be expected, the general consensus amongst analysts seems to be for more strength in canola heading into spring, especially as the fight for acres south of the border heats up.

Soybeans and corn at the Chicago Board of Trade both reacted to bullish supply/demand data released Jan. 12 by the U.S. Department of Agriculture, which forecast supplies of the two commodities at very tight levels by the close of the current crop year. The tight supply situation will see the two crops work to ration demand going forward, while also

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heightening the acreage battle as both could stand to see increased plantings in the spring. Corn futures ended the week at their highest levels in 30 months, while soybeans were at two-year highs. Wheat found itself caught up in the rally as well, with the largest advances in Minneapolis and Kansas City. Chicago wheat futures were also mostly stronger, but lagged the other markets to the upside as U.S. wheat supplies are thought to be sufficient to meet the demand.

There are a finite number of acres to go around, and no matter how high prices climb, there will likely not be enough to meet all of the demand, even if U.S. farmers start plowing under their hayland. Some acres may come out of smaller U.S. crops, such as oats and flaxseed, to go to the big two, soybeans and corn. That scenario bodes well for those minor commodities that fly under the radar in the U.S., but are still a key part of rotations in Canada. Prices look to have no choice but to go up if end-users want to make sure the necessary acres go in the ground for all commodities.

Canola moved above the psychological $600-per-tonne level in the nearby March contract during the week, but failed to hold above that chart point. Canola lagged soybeans to the upside, with the strong Canadian dollar partially to blame.

While the profit-taking retreat in canola could be seen as a bearish technical signal, the market consensus still points to further gains heading into the spring, given the situation in the U.S. Canola supplies are also expected to be on the tight side, as domestic processors continue to crush at a record pace and exports remain solid.

Depending on who you talk to, canola could climb another $50, $80 or even more ahead of the spring.

While the acreage battle rages in the U.S., the other factor moving the markets around these days is the weather situation in Argentina. Hot, dry conditions for most of the past month have been bullish for both the oilseeds and the grains, as the country is a major soybean and corn producer. Fields finally saw some much-needed precipitation during the past week, and forecasts were starting to look wetter going forward.

Opinions are a little divided among grain traders on what the rain at this stage of the game will mean for production, with some of the opinion that it’s “too little, too late,” and others still holding on to the potential for relatively decent crops from the country. In any case, the simple math will mean that more rain in the area will be bearish, while a return to dryness would be bullish.

Chinese demand, or lack thereof, could also throw a wrench into the grain and oilseeds. The country represents the largest import demand right now, but is making moves to slow its inflation. The concern in the markets now is that movement in China’s financial sector will lead to reduced demand for commodities if lending costs go up.

Phil Franz-Warkentin and Brent Harder

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CNS

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