Canola futures on the ICE Canada trading platform posted some modest advances during the week ended Dec. 3, with some of the upward momentum coming from the general strength displayed by the outside oilseed markets.
CBOT soybean and soyoil values both posted some significant advances on the week with new contract highs also established in Malaysian palm oil and European rapeseed futures.
Talk of fresh export business with Mexico and Pakistan helped to influence the price gains seen in canola. Steady domestic processor demand, amid generally favourable crush margins, also was an underpinning price feature.
The upside in canola was restricted by the upswing in the value of the Canadian dollar, particularly as it neared parity with the U.S. greenback. Larger than expected Canadian canola production as reported by Statistics Canada also trimmed some of the price climb.
Western barley futures were pushed to higher ground as commercials tried to find buyers so that they could liquidate their remaining contracts in the commodity. With the unloading of the December contracts, open interest in western barley is now sitting at zero and could be heading the route of other contracts such as oats, feed wheat, peas, and flax, which were delisted quite some time ago.
Chicago Board of Trade soybean futures as indicated, posted some significant advances on the week. Increased concerns about the extremely dry conditions in the soybean growing regions of Brazil and, especially Argentina, fuelled the price gains. Continued strong export demand for U.S. soybeans from China also played a huge role in the upward price momentum. The pull-back in the value of the U.S. dollar during the reporting period further enhanced the price strength.
Wheat futures at the CBOT also posted significant gains with dryness in the U.S. winter wheat belt and quality downgrades to Australia’s wheat crop due to excess precipitation stimulating the upward price action. The lower-quality wheat crop in Canada also factored into the price strength.
CBOT corn futures were pulled higher by the advances in both soybeans and wheat. The dryness in Argentina’s corn-growing regions also helped to encourage the advances. Concerns about the renewal of the U.S.-based ethanol blenders credit bill, tempered the upswing in corn values.
A decision on whether to renew the U.S. ethanol policy has certainly caused some concern in the corn industry. The worries centre around whether the Congress in the U.S. will extend ethanol subsidies which are set to terminate December 31, 2010. Ethanol subsidies are paid to U.S. companies that mix ethanol with gasoline before selling to gas stations, but at a reduced rate. Market participants generally expect that Congress will renew the ethanol blenders credit, but the credit level will be reduced. There is also some thought that the U.S. will allow it to expire completely. If that happens, the demand equation for U.S. corn will take a significant downturn, with CBOT corn futures likely to follow suit.
Statistics Canada released its long-awaited crop production survey results, with the estimates for canola and barley both raising more than just a few eyebrows.
The government agency pegged 2010-11 (Aug./Jul.) canola production in Canada at 11.866 million tonnes, which was above the October projection of 10.430 million and surpassed pre-report expectations that ranged from 10.40 million to 11.50 million tonnes. In 2009-10, Canada’s canola output totalled 12.417 million tonnes.
The jump in output was significantly larger than participants had been anticipating with the number also having the potential to depress ICE canola futures. However, the saving grace was that the demand outlook, from both an export and domestic point of view, remains strong which will easily absorb the extra 1.5-million-tonne supply base.
There also continued to be questions about the acreage base used by Stats Canada to come up with the production forecast. Some individuals feel that the harvest area used to calculate output was too large, and that production was actually lower.
The estimate for barley, meanwhile, was much lower than anticipated. Stats Canada pegged 2010-11 (Aug.-Jul.) barley output at 7.605 million tonnes. This was down from the 8.259 million tonnes projected in October and well below pre-report expectations which ranged from 7.9 million to 8.6 million tonnes. Canada produced 9.517 million tonnes of barley in 2009-10.
As indicated above, the days may be numbered for western barley futures, but not without a fight from ICE Futures Canada, who still believes the contract is a viable option as a risk management tool.
Granted, an official with the exchange was not happy with the fact open interest has now dropped to zero in the commodity. The official pointed out that there were still bids and offers being made in the commodity and that there could still be some life left in the contract.
ICE Canada was already studying the western barley contract to see a structure change was required. Based on responses, most industry participants feel the structure of the contract was fine.
Much of the problem with the contract continues to be the lack of liquidity which ICE Canada officials linked to market conditions outside of the exchange’s control.
A number of options will be considered before any decision will be made to remove the western barley future, including maybe changing the structure of the contract to an over-the-counter contract.
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