Fundamentals Still Lean Toward $700-Per-Tonne Canola

Nearby canola futures on the ICE Futures Canada trading platform experienced a minor setback during the week ended Jan. 28 while the more-deferred contracts continued to trek upward.

Much of the price weakness in canola was reflective of profit-taking, especially as new highs were established. Declines in Chicago Board of Trade (CBOT) soybean and soyoil values, along with the improved growing conditions for soybean crops in Argentina, also had bearish price implications for canola.

Keeping a firm floor under canola was the strong demand from the domestic and export sectors. Fresh Canadian export business with Dubai also provided a firm floor for canola values.

Western barley futures maintained their unchanged price trend, with open interest in the commodity remaining at almost zero.

CBOT soybean futures eased during the reporting period, with overbought market conditions and a dropoff in Chinese demand ahead of that country’s Lunar New Year holidays behind the weakness. The improved weather for the development of Argentina’s soybean crop also influenced some selling interest.

Keeping a firm floor under soybeans was the tight supply outlook and the need to keep prices high in order to encourage U.S. producers to seed area to the crop this spring instead of corn. Sentiment that China will again be an aggressive buyer, once the Lunar New Year holiday is over, also generated good support.

Corn values at the CBOT also suffered losses with a dropoff in demand from the export and domestic sectors associated with the downward price slide. Profit-taking after values hit new highs also was an undermining price influence.

Wheat futures at the CBOT managed to see some minor advances. The strength in wheat was associated with tight worldwide supplies of high-quality wheat and a pickup in demand from importing nations.

Late-week profit-taking restricted the price gains, with the weakness in soybeans and corn, also slowing the uptrend in wheat.

ODDS AND ENDS

A little way back, I suggested canola futures on the ICE Futures Canada trading platform had a chance of hitting $700 per tonne. While my colleagues here were scoffing at that kind of price target at the time, the reality of the situation is that canola continues to move toward that goal, albeit slowly.

DWAYNE KLASSEN

The fundamentals for canola hitting that mark continue to fall into place, especially as exports and domestic consumption of the commodity continues to remain at a strong pace.

Canada’s annual canola crush capacity has grown to around the 7.5-million-tonne level and there are already plans by a number of companies to add further processing capacity in both Eastern and Western Canada in 2011. As a result, Canada’s canola crush pace is running at record highs and will continue to push those boundaries. Of course, with record processing levels comes the need to keep those plants running and canola coming up the driveway on a regular basis.

Canada’s canola export program has also been quietly strong, and was ahead of the year-ago pace at present.

The stocks-to-use ratio for canola cannot run at such a high level and not have some bullish price implications. The 2010-11 ending stocks picture for canola has been tightening, and depending on whose supply/ demand balance sheets you use, red flags are starting to pop up.

Adding to the bullish price scenario is the potential for another extremely wet spring in a number of key canola-growing areas of the Canadian Prairies. Quite a few well-placed industry officials have already expressed concern that canola area could suffer this spring due to excessively wet conditions.

Certainly most of these individuals anticipate record-large seeded area this spring to canola, but weather as always will dictate what actually goes in and comes out of the ground.

Some Canadian canola acreage estimates making the rounds call for seeded area to hit the 18.5-million-acre level in the spring of 2011, which would be up from the 2010 level of 16.8 million.

While some serious area will likely be seeded to canola this spring, wheat may be another crop worth examining more closely.

Estimates from the trade suggest all wheat area in Canada this spring will be in the 23-million acre range, which would be up from the 21.13 million seeded last year. Both spring wheat and durum acreage were projected to be up from the year-ago level.

A few producers have come forward and indicated that through the Canadian Wheat Board’s pricing programs they have been able to get over $8 a bushel for No. 2 Canada Western Red Spring (CWRS) wheat that has been sitting on-farm for quite some time. They indicated that selling a truckload here and there, as prices rise, has proved beneficial to the farm income baseline.

These producers have also indicated they’ve been able to get a new-crop price for the same class of wheat in the $8.50-per-bushel range.

The lack of high-quality wheat supplies globally, and indications that Russia and Ukraine may again be out of the world wheat market due to production problems, suggest the price outlook for wheat also could turn out to be pretty strong.

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

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