Hot U.S. temperatures make for hot markets

Canola futures on the ICE Canada platform continued their upward trek during the week ended July 20 with the weather concerns in the U.S. Soybean Belt providing much of the price strength.

The gains in canola ranged from $20 to $24 per tonne. The new long-range weather outlooks (as of July 20) for the main soybean-growing regions in the U.S. called for very little precipitation and continued hot temperatures through to September.

Soybeans have entered into the crucial pod-filling development stage and need adequate moisture during this growth period. The absence of rain, as a result, provided strong support. The rally in CBOT soybean futures pulled canola upwards with fresh commodity fund and speculative demand helping to generate some support for canola.

While U.S. soybean yields continue to be threatened by the weather, conditions for the development of the canola crop in Western Canada were said to be better than average, especially with the recent arrival of timely precipitation. The humidity that has accompanied the weather patterns on the Canadian Prairies has accelerated the maturity of the crop with a number of regions looking at an early harvest.

This in turn restricted the upside price potential in canola during the week. Steady farmer deliveries of canola into the cash pipeline, as producers empty out bin space and try to take advantage of recent strength in the cash market, also limited the price gains.

Commercials continue to be the only participants willing to engage in activity in the new barley contracts on the ICE Canada platform. There was some volume seen at mostly firmer price levels. The gains in CBOT corn and the tight feed barley supply situation in Western Canada remains supportive.

Arbitrage pricing accounted for the price jump in ICE Canada milling wheat and durum futures. No actual trade was seen during the reporting period. Soybeans were the dominant force on the CBOT futures market during the week, with a number of contracts establishing new all-time record highs.

The rally was linked mainly to the weather and in part to demand, which does not seem to be easing at these high prices. Old-crop soybean stocks are already on the tight side, and with the weather threatening to reduce new-crop production, the need to ration demand has never been greater.

There are already ideas that soybean values could move significantly higher yet if the yields are indeed reduced and demand fails to decline. There were ideas making the rounds that Brazil’s soybean crop was so small that it has had to begin importing the crop from Argentina.

The thinking is that it’s only a matter of time before Brazilian end-users start looking at U.S. soybean stocks to cover immediate needs. This would only put further upward pressure on prices. Corn futures also benefited in terms of price from the weather situation, but the gains in soybeans really helped to propel those values to higher ground. Tight old-crop corn stocks in the U.S. contributed to the upward price action.

The advances in corn were capped by the sharp drop-off in demand from the ethanol and livestock sectors, especially as futures continued to climb. Sentiment that the damage to the U.S. corn crop has now been factored into the market, also restricted the gains in those values.

Export interest in U.S. corn has also seen some significant declines. Wheat futures on the CBOT, MGEX and KCBT posted significant gains during the week with a lot of the upward price momentum associated with the strength displayed by Chicago corn.

The advances in wheat also continued to be linked to the uncertainty facing wheat output in some of the other major global wheat producers. Flooding in the Black Sea region, drought in Australia have all contributed to this uncertainty. The upward action in spring wheat futures in Minneapolis were tempered by the fact that the crop in the northern tier U.S. states was developing quite nicely. Demand from the U.S. livestock sector has also picked up, which helped to provide wheat values with some underlying support. Weather issues continue to be the main influence on the grain and oilseed markets in Chicago and Winnipeg. There will be little in the way of other fundamentals that will get in the way, unless there is a major change in the U.S. weather pattern.

The rally in soybeans will last only so long, and has already sparked ideas that South American farmers will seed record acreage to the crop this fall in hopes of capturing some of these strong prices. This could result in a bumper soybean harvest from this region in January or February.

From a logistical viewpoint, this will be more than enough to temper any U.S. soybean shortage. However, on the other hand, a crop yield failure in South America would then send soybean values to new heights. Meanwhile, an advantage for canola is that values have definitely lagged behind that of soybeans and have become a much cheaper alternative for end-users, which in turn could promote some fresh export demand from non-traditional importers.

But even with all the supportive fundamentals in the market, the macroeconomic picture continues to hang over the upside potential. The financial situation in Spain continues to be unsettled at best and has the potential to throw a lot of bearish sentiment into the commodity markets at a drop of a hat.

On a different note, the Canadian Wheat Board while touting its wheat, barley and durum programs that will begin on August 1, 2012, continues to hold back details on its canola program.

The organization continues to say it will indeed provide a program for canola, but details remain scarce. Officials with the CWB have indicated that their sales people who handle wheat, durum and barley, will have no problems covering canola sales abroad.

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