Rising canola futures find point of resistance

Canola futures on the ICE Futures Canada trading platform moved higher during the week ended March 16. Concerns about the record pace of usage and the resulting depletion of old-crop canola stocks stimulated some of the upward price action.

Chart-related speculative fund buying interest also contributed to the price advances. Much of that buying was tied to efforts by this group to see the May contract penetrate key technical resistance at the $600 level. While the contract briefly moved above this level, the push did not last long, and values were quickly pushed back below that mark.

Further attempts by these participants will occur. If the contract can close convincingly above $600, there are ideas that a push to $625 may be in the cards.

The strength in canola was also tied to worries about the dry conditions that currently exist on the Prairies and ideas that the dry weather will reduce the crop’s yield potential.

The trade is currently anticipating that a record 20 million to 21 million acres of canola will be seeded this spring in Western Canada. However, with the potential yield losses, market participants are of the belief that area will need to be even higher in order to offset the dryness issues.

As a result, some of the price advances in canola also reflected efforts by the commercial sector to buy more canola acreage.

The market analysis branch of Agriculture and Agri-Food Canada also released an updated supply/demand table during the latest reporting period, which seemed to confirm the tight old-crop supply situation for canola.

The latest 2011-12 canola ending stocks forecast came in at just 700,000 tonnes, which was down from the government agency’s February projection of 1.1 million. AAFC is now forecasting Canadian 2012-13 canola carry-over at 850,000 tonnes, down from the previous month’s 1.25 million.

At one point Canadian canola stocks above one million tonnes would have been considered more than adequate, but that is no longer the case. In fact, the canola sector becomes extremely concerned when stocks now drop below the one-million-tonne level.

Demand in the new marketing year was also expected to outstrip the canola supply base in Canada, especially if projections for China to be an aggressive buyer hold true. As mentioned in last week’s column, China was seen buying as much as three million to four million tonnes of Canadian canola in the 2012-13 (Aug./Jul.) season. That would be significantly higher than the one million to two million tonnes forecast for 2011-12.

Activity in the milling wheat, durum and barley contracts on the ICE Futures Canada platform remained non-existent. Most of the price action was again tied to arbitrage by ICE Futures Canada and was dependent on the placing of bids or offers by commercials.

Activity in western barley futures on the ICE Canada platform also remained dormant.

Chicago Board of Trade (CBOT) soybean futures experienced some significant gains during the period ended March 16. Support in the commodity continued to come from talk of fresh export demand from China. That buying interest was facilitated by ideas the reduced South American soybean crop size will force China to seek out alternative suppliers, primarily the U.S.

The need to buy acres for soybeans also generated some of the price strength. The warm weather that has hit the Prairies has also dominated regions of the U.S. The early spring in the U.S. was seen encouraging farmers there to start planting corn rather than soybeans.

There were also indications that soybean supplies are tighter than the numbers the U.S. Department of Agriculture is working with. That further lent support to CBOT futures. A solid crush pace during February also added to the uptrend in soybeans.

CBOT corn futures posted gains, with old-crop values leading the upward price climb. Much of the support in the nearby months was associated with the extremely tight old-crop stocks picture. The advances in new-crop contracts were restricted by the expectation of record area being planted to the crop this spring by U.S. farmers.

Some of the support in corn also came from hopes of additional export business with China. There are ideas that China’s corn crop is in trouble, and that to make up the shortfall, China will turn to the U.S. for its supply.

Wheat futures at the Chicago, Kansas City and Minneapolis exchanges posted some significant advances during the week. The uptrend in wheat was linked to some spillover from the gains seen in both soybeans and corn. The buying back of previously sold positions also influenced some of the price strength. Gains were also attributable to reports that Europe’s winter wheat crop was at least five million to six million tonnes lower than expected due to damage from extremely cold temperatures. However, burdensome levels of wheat on the world scene continued to restrict the upside price potential.

Viterra certainly garnered a lot of attention this week with news of a number of suitors trying to acquire the agribusiness. Glencore, the once-secretive Swiss commodities giant, reportedly started the proceedings in hopes of gaining a greater geographical presence. Not to be outdone, Cargill, ADM and even Bunge are also reported to have stepped up to the plate, all willing to purchase the shares of Viterra.

The reason to acquire Viterra is fairly clear, it all has to do with market share and profit margins. Current estimates have Viterra handling roughly 45 per cent of the grain traded in Canada. With the Canadian government liberalizing grain trading this summer by ending the Canadian Wheat Board’s monopoly on the marketing of wheat and barley, Viterra’s share was seen increasing by an even larger amount.

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