Weather Issues Continue To Support Markets – for Jul. 29, 2010

ICE Futures Canada canola contracts edged moderately higher during the week ended July 23, testing upside technical targets in the process.

Weather issues, both in Canada and Europe, continue to provide support, though with nearby Nov. canola futures rallying $83 per tonne since the start of June, a large measure of Canadian production problems has now been incorporated into the current market. In fact, trade sentiment is now starting to shift that 2010 Canadian canola production has stopped deteriorating and perhaps crop size may be starting to move up from earlier discounted ideas.

That could also be the case with the European rapeseed crop where continued dry conditions have stressed output there, but perhaps not as badly as earlier indications suggest.

Nonetheless, price trends in both markets have not given any solid indication of topping at this time. But unless new threats to production arise, look for some possible corrective price action lower sometime in the immediate weeks ahead. Downside price risk though remains limited given ongoing production uncertainties.

Price charts at the present time remain bullish… certainly with recent buy stops hit following the Nov. canola contract breaking above $440/tonne. Currently the Nov. is meeting chart resistance at about the $460/tonne mark – considered a technical swing target on the charts.

Gains in Chicago soybeans, improving global economic sentiment, and still a soft tone to the Canadian dollar added to the positive momentum we have seen in canola. Fresh export pricing was also said to be taking place, possibly to China, although there was no confirmation.

Farmer selling, encouraged by the recent advances, has tempered the upside in canola though. Ideas that the market may be vulnerable to a profit-taking correction also helped keep the advances in check.

Also something of note: chart seasonals for both soybeans and canola have a tendency to turn lower at some point in the June/July time frame. But so far, market bulls remain in control.

Western barley futures remain steady, with an upward bias, though open interest has been stagnant. Cash feed barley markets have ticked slightly higher. But the upside is still seen as limited by the likely abundance of competing feed ingredients this year, such as wheat and U. S. DDGS.

Chicago soybean futures at the Chicago Board of Trade have rallied sharply over the past two weeks, but prices have stabilized at the springtime highs. November bean futures managed a test in the past week up to the US$9.90/bu. high posted in April, but has since stalled and corrected slightly lower.

Weather uncertainty for the U. S. Midwest growing season remains a key supportive influence with the bean crop’s critical pod-filling stage still ahead in August. Tight old-crop supplies and steady demand from the export sector has also helped hold prices in the upper end of established longer-term trading ranges.

But with near-term Midwest weather forecasts generally favourable, some of the immediate risk premium has been withdrawn from the market. The near-term forecast calls for a near-daily chance of rain, which has limited concerns about warmer temperatures.

Chicago corn futures also managed to rally up to four-month-high territory over the past two weeks. But like soybeans, corn has taken a bit of a consolidative break over the past couple of trading sessions. Much of the recent strength in corn had been associated with spillover gains seen in CBOT wheat values. Some weather-related issues helped to fuel some minor buying interest. Strength in the energy sector was also an underpinning price influence.

But the corn rally has softened as near-term weather forecasts have moderated the previous hot-dry sentiment. Forecasts now call for generally moderate temperatures. But while temperatures are still expected to heat up to above-normal levels next week, above-normal rainfall is also expected, which is generally supportive as U. S. corn crops progress rapidly through the critical pollination phase of development.

U. S. wheat markets have demonstrated surprising upside price leadership over the past three weeks, now testing highs last seen back last November. While production issues are lowering crop prospects in Canada, northern Europe and into Russia and served as well-advertised fundamental catalysts for the rally, there is a sense in the marketplace that much of the upward momentum has been generated by speculative short-covering, more so than that fundamental-based bullishness.

And when the speculative fund sector is in the process of liquidating or establishing a position, there is a risk of price moves being exaggerated; this is where we feel the market is today. Export sales internationally remain rather slow, with price activity in the physical cash markets not reflecting a sense of panic by end-users.

Therefore, the wheat market seems to have made the switch from being overly bearish to bullish too quickly and likely needs a period to correct lower before upside momentum can be sustained.

But for the moment, price charts remain pointed higher until this speculative-driven buying momentum exhausts itself.


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