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Profit-Taking Hammers Canola

ICE Futures Canada canola contracts saw a roller-coaster of a week during the period ended Feb. 18, as the bottom finally fell out of the market and participants took profits after the steady rise over the past few months. However, after four straight days of large declines, values stabilized for a day, bounced higher and then ran into some more selling.

Not to read too much into the charts, but the drop, pause and then slight recovery in canola could be said to mark a classic “hammer” pattern in the Japanese candlestick school of technical analysis. If the traditional interpretation of that hammer pattern holds, canola may have hit its low for the time being and could be setting itself up for another run at fresh contract highs. However, canola lacked any immediate follow-through strength on its short-lived recovery. In any

case, the $575-to $581-per-tonne area does represent some solid nearby support in the May contract.

Demand remains solid underneath the market from both exporters and domestic crushers, but activity in the outside markets may provide more direction in the near term as canola works to regain its footing.

In the U.S., it was a similar story in soybeans, corn and wheat, with all three commodities seeing some large price swings. Wheat and soybeans both ended with large declines on the week, while corn managed to finish narrowly mixed. Corn boasts the tightest supply/demand fundamentals of the three, which accounted for the relative firmness in the commodity.

CLOTHES-MINDED

The “food-versus-fuel” debate is often played up as one reason providing some underlying strength to the grains and oilseeds, as the demand from ethanol and biodiesel production props up the commodity markets. There’s another battle going on that we don’t hear about as much here in Canada, but that is providing spillover support to corn and soybeans. You could call it the “food-versus-fabric” debate.

While the market did run into some profit-taking Friday, U.S. cotton prices are still at their highest levels in 150 years. At nearly US$2 per pound, cotton is trading at levels not seen since the U.S. Civil War between the North and the South disrupted production and movement of the commodity. Cotton is grown on the same land where southern U.S. farmers plant soybeans and corn, adding a third player to that “fight for acres” we hear so much about.

As with most everything else these days, the largest demand for cotton is coming from China, where it’s used to make the T-shirts and towels that fill our North American stores. China is a major cotton producer in its own right, but doesn’t grow nearly enough to meet the demand of the textile factories which are said to be ramping up production as the global economy improves.

According to U.S. Department of Agriculture data, China is expected to use up 47 million bales of cotton during the current crop year, while only producing 30 million bales. Filling that deficit should take global cotton stocks to their tightest levels in 15 years.

The U.S. is the world’s largest cotton exporter, and the strong cotton prices are working to encourage farmers to seed more acres to the crop. A planting intentions survey recently released by the National Cotton Council in the U.S. forecast a 14 per cent increase in U.S. cotton area, to 12.5 million acres, this spring. That area will primarily come from soybeans and corn, which would also like to see their own acreage increases.

How the whole acreage battle plays out will likely vary from farm to farm, as rotations and individual factors are taken into account. Cotton isn’t an option for farmers in Canada’s northern climate, but keeping an eye on that market could provide some insight on the broader factors at play, as movement in cotton is often seen as an indication of the wider economic activity.

Whatever happens, it should keep the markets interesting until the acreage questions are settled and everything is in the ground.

– 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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Forthree-times-dailymarket reportsfromCommodityNews Service,visitICEFutures Canadaupdates”at www.manitobacooperator.ca.

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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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