Market Upside Limited From Flooded Prairie Acres

ICE Futures Canada canola contracts were mostly lower during the holiday-shortened week ended June 30, as a sell-off in U.S. grains and oilseeds spilled over to weigh on values. While weather problems in parts of Western Canada and unseeded acres remain supportive, improving crop prospects for the canola that’s in the ground served to lessen some of those concerns.

The flooded land in western Manitoba and eastern Saskatchewan is too far gone to be salvaged now, which means there is likely not much more upside to wring out of the futures. However, the weather elsewhere will be a factor to watch, especially as those unseeded acres will cut into the overall production potential.

Anecdotal reports from some producers who did manage to get some canola in the ground point to a relatively good crop, although development is behind normal.

Sharp increases in the Canadian dollar during the week, together with the fact that canola was lagging its U.S. counterparts to the downside, caused crush margins to deteriorate considerably. That deterioration could push the processors to the sidelines, but scale-down pricing is to be expected if canola futures fall too far.

From a chart perspective, there was some damage done to the canola technical picture with the June 30 price slide, as the most active November contract dipped toward nearby support. While an oversold recovery could provide a bit of a bounce in the upcoming weeks, it will take a weather scare either in Canada or with the U.S. soybean crop to maintain a sustained upward move.

SURPRISES FROM USDA

In the U.S., soybeans, corn and wheat chopped around in range-bound activity for most of the week, as traders positioned themselves ahead of the June 30 acreage and stocks reports from the U.S. Department of Agriculture. When those numbers finally did come out, they were surprisingly bearish for corn. The wheat data was also on the bearish side. The soybean numbers were on the neutral side, with a decline in acres being offset by larger stocks, but soybeans still moved down in sympathy with corn.

The USDA pegged U.S. corn area in 2011 at 92.3 million acres, an unexpected upward revision from the last official estimate and well above trade guesses near 90.7 million and the 88.2 million acres seeded the previous year. Corn stocks were also bearish, as the USDA numbers showed supplies were not as tight as many market participants had feared.

Second-guessing on the corn data started up as soon as the USDA released its report, and oversold ideas could easily send prices back higher, especially if any new weather scares materialize. However, those official numbers do provide a baseline heading into the summer months.

For soybeans, the acreage projection was actually a little smaller than expectations, at 75.2 million acres. That compares with 77.4 million a year ago and the smaller acreage base could be supportive heading through the summer, as the crop needs to see good yields in order to replenish supplies.

Larger-than-expected U.S. wheat supplies also came as a surprise, although the spring wheat futures in Minneapolis did not decline to the same extent as the other wheat markets during the week.

The USDA estimated U.S. spring wheat acres at 13.6 million, at the high end of trade guesses, but in line with the 2010 seedings. However, actual spring wheat acres were likely smaller given some of the problems seen in North Dakota this spring.

Officials in the state estimate at least a quarter of the land normally seeded to annual crops will be left fallow this year, with a good portion of the remaining fields likely flooded out or hurt by excess moisture.

Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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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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