The roller-coaster ICE Futures Canada canola market climbed to some very high levels during the week ended Oct. 8, hitting the elusive $500-per-tonne level for the first time in many months at one point Friday before backing away as harvest pressure and profit-taking came forward. The gains were largely a knee-jerk speculative reaction to some unexpectedly bullish U. S. production data, but could be seen as boosting the market into a higher price range in the long term.
Strong export demand, with activity at the West Coast remaining rather brisk and talk of fresh end-user demand coming forward during the week, added to the firmness in canola. However, I’ve heard it said many times that “the best cure for high prices is high prices” and the jump in values also led to a fresh round of farmer hedges. With ideal harvest conditions allowing producers to make some good progress across the Prairies, that harvest pressure should be expected to temper the upside in the futures, or at least keep basis levels wide. However, looking further
out, the path of least resistance still appears to be higher in canola, especially once the harvest pressure backs away. Supplies are tighter this year, while demand remains strong. In addition to the steady exports, Canada also has a larger crush capacity this year and relatively favourable crush margins will keep the processors in the market sourcing supplies. Canada crushed about 4.7 million tonnes of canola in 2009-10, and could be on pace to hit a record 5.5 million tonnes in the current crop year.
Barley futures actually saw a little bit of activity during the week, bouncing up and down, but trade in the futures remains nonexistent for the most part.
Strong demand, coupled with smaller-than- expected supplies, appears to be the story in all the North American grain and oilseed markets right now.
The updated U. S. Department of Agriculture production data was the big news of the week, and it came as a shock to market participants. Expectations for a relatively bullish report had kept soybeans and corn supported heading into Friday’s data, but the actual numbers were even more bullish than traders had anticipated – causing prices to finish the week with limit-up advances.
The corn numbers were the biggest surprise, including a sharp reduction in average U. S. corn yields to 155.8 bushels per acre from 162.5 a month ago. The lower yields cut into the supply/demand estimates, with USDA now predicting corn ending stocks of below a billion bushels by the close of the 2010-11 crop year. As recent as two months ago, USDA was predicting a record-large U. S. corn crop, but the crop failed to meet those expectations. While production will still be the third largest on record, the tighter balance sheet will lead to some rationing of demand.
The size of the U. S. soybean crop was also revised lower by USDA, but the numbers fell well within the range of pre-report guesses. While strong export demand helped underpin soybeans as well, most of the gains in the commodity were tied to its close relationship with corn, and the need to make sure the two crops keep pace with each other. Next year’s crop is still very far away, and U. S. producers are still focused on harvesting the current crop. However, the attention in the markets is already starting to turn to the “battle for acres” that will only be heating up through the winter, with both soybeans and corn not wanting to lose any acres to the other crop.
Wheat prices went along for the ride higher, with U. S. wheat supplies also revised lower by USDA. Any new wheat numbers were largely in line with market expectations, but with corn so surprisingly tight, the close relationship between the grains meant wheat also needed to keep pace with its counterpart.
If U. S. grains and oilseeds continue to climb higher, that will create some other trickle-down effects in the agricultural markets. Rising feed grain costs are good on one hand, especially given the increased feed supplies around this year. However, the higher feed prices also cut into the profitability of the livestock sector.
Gains in the commodity markets were also behind some of the general strength in the Canadian dollar during the week. A number of analysts came out with forecasts calling for a currency at parity with the U. S. dollar, or even stronger, sooner rather than later. A strong Canadian currency is great for cross-border shopping, but not so great when it comes to the prices seen in the Canadian agricultural markets.
Phil Franz-Warkentin and Dwayne Klassen write for Resource News International (RNI), a
Winnipeg company specializing in grain and commodity market reporting.
Forthree-times-dailymarket reportsfromResourceNews International,visit“ICEFutures Canadaupdates”at www.manitobacooperator.ca.