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Strength in soybean futures supports canola values

Pre-USDA report jitters dominated the North American oilseed markets during the week ended Aug. 10, with weather playing a secondary role in determining price direction of both the grain and oilseed sectors.

ICE Futures Canada’s canola futures lost $1 per tonne in the nearby November future while gaining $7.60 in the far-deferred July future. Commodity fund and speculative account positioning was a key feature of the trade in canola leading up to the important U.S. Department of Agriculture numbers that were released Aug. 10.

The quick development of canola on the Prairies and the advancing harvest operations in select locations helped to fuel some of the downward price action in the commodity. The increased abundance of supply also created some bearishness, as end-users were a little less reluctant to be aggressive buyers at this point. The move by the Canadian dollar above parity with its U.S. counterpart also was an undermining influence on values.

The harvest of a large Canadian canola crop also continued to hang over prices. There is certainly no dispute that the canola crop in Western Canada will indeed be large, but there are signs emerging that yields will not be as huge as first anticipated. Disease issues are being raised in all three Prairie provinces, with varying degrees of infection.

Strength in CBOT (Chicago Board of Trade) soybean futures helped to generate support for canola as did the overall tight global oilseed situation.

Arbitrage pricing again accounted for the movement in values seen in ICE milling wheat and durum futures. No actual trade was seen during the reporting period. No new barley contracts were traded, with the commodity beginning to follow the path of the recently delisted ICE western barley future.

Demand rationing

CBOT soybean futures managed advances during the week with the prospects of reduced production due to the absence of rain during the critical pod-filling stage of development behind the strength. The need to ration demand also contributed to the price advances.

The taking of profits and chart-related liquidation ahead of the report kept the upside price potential in check.

The release of supportive USDA production and supply projections helped to generate some late-week support.

Corn futures on the CBOT mostly managed to post small gains with some of that strength riding the coattails of soybeans. The advances in corn were offset by the actual USDA confirmation that the crop will be smaller.

The sharp decline in demand for corn as a livestock feed helped to temper the price strength. Concerns about reduced corn usage in the U.S. ethanol industry further limited the price gains.

Wheat futures on the Minneapolis and Kansas City exchanges generally lost ground during the week, while most CBOT wheat values posted small gains. The early and quick spring wheat harvest pace in the northern-tier U.S. states encouraged the declines seen at the MGEX and KCBT. The pickup in demand for U.S. soft wheat by the U.S. livestock feed sector helped to generate some strength. Continued talk of global wheat production problems added to the upward momentum seen in CBOT wheat values. The USDA report, however, disputed some of that thinking.

CBOT soybean futures remain fundamentally bullish and will be strongly supported by the Aug. 10 USDA report. The report pegged U.S. soybean yields at their lowest level in nine years at 36.1 bushels per acre and production at only 2.692 billion bushels. There remains a strong inverse in the forward curve of soy futures, indicating a great deal of concern from commercial traders with respect to sourcing adequate supplies to meet demand.

The report data emphasized the importance of the soybean crop in the field. As a result, attention will likely shift back to rainfall for the filling U.S. bean crop over the next couple of weeks. There are still some rains in the near-term forecast, along with cooler temperatures — but timely rains need to continue into September to assure adequate pod fill.

The tight soybean supply situation did not stop with the U.S. crop, as South American supplies are also extremely tight to virtually non-existent. The USDA reduced its July 2012-13 global soybean ending stocks estimate from 55.66 million tonnes down to 53.38 million, which was not necessarily mind boggling, but will be an important number to keep in mind. Soybean supplies are expected to be extremely tight from the fall right until the late winter, when new South American soybean supplies will become available.

There are already ideas South American farmers are going to plant record acreage to soybeans, but weather — and any other issues that could impact production — will certainly be watched closely.

The benefit to Canadian producers is that end-users who are tired of paying high values for soybeans will look for alternatives, including canola.

U.S. corn production estimates were pegged at 10.779 billion bushels, while production yields were lowered to 123.4 bu./ac. Old-crop ending stocks were reported at 1.021 billion bushels, while new-crop ending stocks were forecast at 650 million bushels. USDA’s balance sheet also showed a dramatic decline in projected use.

The USDA report was considered net bearish for the wheat market, causing double-digit losses across all three U.S. wheat exchanges. USDA raised domestic U.S. ending stocks to 698 million bushels, surpassing analysts’ highest estimate of 673 million bushels. Domestic production is also expected to increase to 2.268 billion bushels versus 2.224 billion bushels last month. Global figures were bearish as well. USDA lowered world production and ending stocks by a considerably smaller percentage than expected, despite considerable reductions and key wheat-producing countries.

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