Funds trample market fundamentals in fleeing canola

The ICE Futures Canada canola market continued to fall apart during the week ended Sept. 28, as speculative long liquidation took precedence over any fundamental support that might still be there. The most active November contract fell below the psychological $600 per tonne level during the week, and settled below that key chart point for the first time since June.

Over the summer months, speculative fund traders put on very large long positions in most of the North American grain and oilseed futures markets. Those bets that prices would rise saw open interest in canola hit an all-time record high on Sept. 13 of 247,470 contracts. The fund liquidation since that point took 30,000 contracts out of the market, or about 12 per cent of the total open interest. Trade participants say the funds are still holding more canola contracts that they could still be looking to sell — but whether they will sell or return to the buy side remains to be seen.

The situation in the underlying fundamentals hasn’t changed that much for canola over the past two weeks, as concerns over tightening supplies remain supportive overall. Statistics Canada releases its updated production estimates on Oct. 4, and market participants will be watching the canola number closely to see just how much smaller it is.

Back in August, StatsCan pegged the canola crop at a record 15.4 million tonnes. However, the prospects have deteriorated considerably since that point, and the question now is whether or not the survey will account for the disappointing yields being anecdotally reported. The most pessimistic estimates have placed the crop below 14 million tonnes. While that would have been a very large crop only a few years ago, the industry has changed — and the expanded crush and export sectors may need to ration some of their demand if the crop isn’t there.

Wheat, durum and barley contracts at ICE Futures Canada didn’t really see any actual trade during the week, although there were enough bids and offers in wheat to cause prices to bounce around a little as the exchange adjusted prices after the daily close. Wheat prices in the Winnipeg market fell in sympathy with the U.S. futures during the week.

South of the border, the U.S. Department of Agriculture released its much-anticipated quarterly stocks report on Sept. 28. Participants holding onto large long positions were heavy sellers in the lead-up to the report as they didn’t want to be stuck with their necks out if the report contained any bearish surprises. Soybean supplies were a little on the high end of trade guesses, but corn and wheat stocks were both tight. The resulting rally in the grains helped pull soybeans and canola up as well, to end the week with a bit of a recovery.

The U.S. Commodity Futures Trading Commission provides a weekly breakdown of who holds what position in the country’s futures markets. That commitment of traders report shows that managed-money (fund) traders have liquidated a large amount of long positions over the past few weeks.

That fund buying in all of the North American agricultural commodities was driven in part by drought concerns in the U.S., as weather issues and the resulting expectation for tightening supplies pulled prices higher. However, better-than-expected yield results in some cases, as the soybean and corn harvests come in at a fast pace, have caused speculators to take some of that money off the table.

The early indications pointing to large South American soybean and corn crops were also bearish for prices. But the biggest factor behind the sell-off was the renewed sense of uncertainty in global financial markets. When traders with no skin in the agricultural game get nervous, they show less interest in so-called “risky assets” such as grains and oilseeds. When that happens, they then turn to supposed “safe havens” such as gold, bonds and the U.S. dollar.

The Canadian dollar is also considered a risky asset on occasion, and the fact it lost about two thirds of a cent relative to its U.S. counterpart during the week was somewhat supportive for canola.

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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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