ICE Futures Canada canola contacts moved higher during the week ended Sept. 1, as production concerns, advances in outside markets, solid end-user demand, and fund buying all provided support. However, the futures did run into some solid resistance to the upside, and profit-taking at the highs served to limit the advances.
Harvest operations are moving full steam ahead across the Prairies, with the bulk of Manitoba’s canola crop expected to be swathed within the first week or two of September. With the weather co-operating for the most part so far, the question now is one of yields and just what kind of production the market will have to deal with.
Statistics Canada recently pegged this year’s Canadian canola production at a record 13.2 million tonnes, which would compare with the 11.9 million tonnes grown in 2010. While production could be record large, the carry-in supplies are thought to be relatively tight, while record-large demand is also expected given the continued expansion in the crush sector.
Early yield reports have been all over the map, with dryness during the growing season said to have hurt yields in some cases, but other fields coming off in reasonably good shape. With the high degree of variability in yields, it could be some time until the market has an overall production number it’s comfortable working with.
While the production is still up in the air, the demand is not going anywhere. Crush margins have hit their strongest levels in some time, which means processors will keep making money, while global demand for vegetable oil also remains solid.
In any case, the general consensus these days is that harvest pressure could slow the upward trend in canola over the next month or two, but the overall outlook remains pointed higher, given that strong demand and the likelihood of a tight supply/demand balance.
Looking at the charts, the November canola contract ran into some serious resistance at the $584-per-tonne level during the week. A break above that could set the stage for a move toward the psychological $600 level or beyond, but on the other side, a profit-taking/hedge-pressure move down to $570 or $550 could also take place.
Canola can also be expected to continue to take its cues from the CBOT (Chicago Board of Trade) soy market, which hit fresh contract highs during the week on the back of declining yield prospects. The soy crop is still some time away from harvest, and persistent concerns over hot, dry conditions cutting the yield potential of the U.S. crop accounted for some of the buying interest.
Production concerns also remain supportive for U.S. corn values, which hit fresh highs of their own during the week. However, the eventual profit-taking setback was more severe in corn than soybeans, and prices there posted weekly declines. The talk in corn is that while the supply situation is tight and production prospects are declining, end-user demand is backing away at these higher prices.
BACK ON THE BLOCK
U.S. wheat prices were also up and then down during the week, with increasing export competition from Black Sea-origin supplies keeping a lid on the upside potential in that market. A year ago, the U.S. was the major player on the block in the international wheat market, as drought conditions kept Russia and Ukraine to the sidelines. However, those countries are now back in the market, selling wheat at a discount to the U.S., which means U.S. wheat prices may have more room to the downside if the country wants to recapture some of that export demand.
Providing some support for wheat is the disappointing U.S. spring wheat crop, which has seen some relatively poor yield results, according to reports out of the northern states.
The ICE Futures Canada barley market actually saw some modest trade during the week, moving higher in thin volumes.
– Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.