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Expect canola to give back some acres this spring

ICE Futures Canada canola contracts moved off their recent highs during the week ended Feb. 15, with speculative profit-taking and increased farmer selling — brought on by the previous week’s rally — weighing on values. The market ran into support to the downside and was showing signs of stabilizing ahead of the Louis Riel Day long weekend.

Farmer selling is thought to have run its course for now, with the line of reasoning from analysts being that producers should have enough money now to tide them over until spring. However, while bins are starting to empty across the Prairies, there is still enough unpriced canola out there to be drawn in the next time basis levels create a good opportunity.

From a technical standpoint, the nearby March canola contract finds itself within a broad range between about $615 and $650 per tonne. A break higher or lower will be highly dependent on what happens in the U.S. soy market. If beans drop, canola will lag to the downside, and if beans climb back above US$15 per bushel, canola could see a retest of that C$650 mark.

Canada’s tightening supply situation is keeping basis levels strong, with the exporters and crushers still showing good demand. As a result, canola will likely lag soybeans to the downside if the U.S. market keeps trending down.

In the U.S., soybeans, corn and wheat were all lower during the week, with the largest losses in beans. Improving crop prospects in South America accounted for some of the declines in beans, while forecasts calling for some much-needed rain across parts of the dry U.S. Plains weighed on the grains.

Looking ahead to spring seeding, rotational issues and competing cropping options should turn some attention away from canola in 2013, after acreage to the oilseed has grown steadily over the past decade. In 2012 canola gave wheat a run for its money for the largest acreage, with 21.5 million acres going in the ground, according to Statistics Canada data. That compared with the all-wheat number of 23.8 million. Early government and industry estimates would see wheat area go up in 2013, with some of that area coming from canola.

Canola seedings broke their previous record by over two million acres in 2012, but a great deal of that extra area went into marginal land in southern Alberta and Saskatchewan. Those areas are better suited to wheat and durum, and the fact that the grains can now be marketed as a cash crop at harvest only adds to the interest in growing them.

Canola acreage might be down, but average yields would still result in record production in 2013 as adverse conditions hampered yields in some cases the previous year. In an early projection, Agriculture and Agri-Food Canada’s market analysis division forecast Canadian canola production in 2013 at 15.5 million tonnes, which would be up from 13.3 million in 2012.

The situation is similar in the U.S., with the usual competing crops, soybeans and corn, both seeing some area shift into wheat in 2013. Early guesses from the U.S. Department of Agriculture would see total wheat area in the U.S. (winter and spring) rise to its highest level in four years. Meanwhile, soybeans are expected to decline slightly from their 2012 record, to 76 million acres.

Overhanging the oilseed markets is South America, where record soybean crops continue to be harvested. Sporadic weather concerns in the continent over the growing season did prop up soybean and canola futures in North America over the winter, but as newly harvested supplies start to become available, those weather issues will become less important.

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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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