Prairie weather not done with markets just yet

ICE Futures Canada canola contracts posted solid gains during the week ended Sept. 14, as production concerns in parts of the Prairies, and expectations that supplies may not be enough to meet the demand going forward, provided support.

Canola ended the week with new contract highs in many months, and the bullish technical signals could be setting the stage for further gains. For the most active November contract, the clear break above $645 per tonne will leave that former resistance level as new support. As far as the upside is concerned, the weekly charts don’t show any real targets until the $680- to $690-per-tonne area.

While harvest pressure does have the potential to slow any advances in the near term, the fact that production is unlikely to live up to earlier expectations should keep end-users as good buyers if they want to secure supplies going forward. Heavy winds and hail during the week damaged canola lying in swaths across the Prairies, although the extent of the damage to the crop as a whole remains to be seen. As long as there is still canola in the fields, expect weather issues to remain a factor in the futures going forward — especially as temperatures turn cooler and the risk of frost rises.

In the grain markets in Winnipeg there wasn’t really very much trade during the week, but the bids and offers that came forward were enough to take milling wheat higher and barley lower. Durum remained unchanged.

In the U.S., wheat and soybeans were up, while corn was down. The big event of the week for the grains and oilseeds in Chicago was the release of the U.S. Department of Agriculture’s monthly supply/demand report on Wednesday. The headline numbers were deemed bearish for corn and bullish for soybeans, and the two commodities reacted accordingly. While both crops saw their yield forecasts revised lower from the previous month, the cuts to corn production did not live up to market expectations, while soybean supplies were pegged below trade guesses. USDA now forecasts U.S. corn yields at 122.8 bushels per acre, down from 123.4 bushels per acre in August and the year-ago level of 147.2 bushels per acre. Soybean yields are forecast at 35.3 bushels per acre, which compares with the August forecast of 36.1 and the year-ago level of 41.5 bushels per acre.

Wheat futures in the U.S. posted the largest gains during the week, although the strength there was less a function of the USDA report and more tied to problems with wheat crops in other parts of the world. Reports out of Australia, Europe and the Black Sea region during the week were all pointing to smaller wheat crops in those key growing regions. Smaller crops elsewhere will mean more demand for U.S. supplies, which supported prices.

Aside from the standard supply/demand storylines, the key factor to watch in the grain markets these days is the global economy. The U.S. Federal Reserve announced new stimulus measures during the week as the central bank continues to try to prop up the U.S. economy. U.S. interest rates have already been effectively at zero for some time, leaving the Fed with fewer options to stir the pot. What the Fed did was announce an open-ended quantitative easing program, sometimes called QE3. This amounts to the government promising to buy US$40 billion worth of mortgage-backed securities per month for an indefinite period, to put some more money into the economy. Many analysts see the QE3 as effectively printing money, which devalues the U.S. currency.

A softer U.S. currency makes U.S.-priced commodities more attractive to international buyers, and the theory behind quantitative easing would see that increased demand offset the resulting weakness in the currency. How that plays out remains to be seen.

Meanwhile, a weaker U.S. dollar usually means a stronger Canadian currency — and the loonie was trading at very strong levels during the week. The stronger Canadian currency makes Canadian products less attractive in the international marketplace.

Another global factor circulating on the sidelines of the agricultural markets these days is the renewed uncertainty in North Africa and the Middle East. The unrest has the potential to sway the financial and crude oil markets, making the international news just as important as the local weather reports when it comes to marketing decisions.

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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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