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ICE Futures Canada canola contracts moved higher during the week ending July 16, surpassing technical resistance on the way up. The weather and production uncertainty that has been the story over the past couple of months remained the primary supportive factor, but there were some rumblings that prices may be high enough for the time being to ration the necessary demand out of the market. Cash bids in the country topping the $10 level in many cases were also serving to pry some canola out of farmers’ hands, and the increased deliveries were another limiting factor.
From a chart standpoint, the solid move above C$440 per ton in the November contract sets the stage for further technical strength, with the next upside target now in the $480 area. Levels that high haven’t been seen on the weekly charts for over a year.
Sharp weakness in the Canadian dollar was also supportive for canola values. A currency analyst I spoke with during the week said further weakness was likely for the Canadian dollar, especially after breaking below some nearby technical levels recently. He said parity was unlikely for the time being, despite Canada’s relatively favourable economic situation, because of the global financial uncertainty.
The weather problems here in Western Canada have been discussed ad nauseum over the past few months, and barring a miracle, will remain the primary supportive factor in the market. That will likely leave many producers facing the unfavourable prospect of looking at high prices from the sidelines without anything to sell.
Western barley futures continue to chug along with some token open interest, but no actual trade taking place. Cash barley bids have also shown some strength on the back of weather concerns recently. However, the upside there will be limited by the likely abundance of competing feed ingredients, such as wheat and U. S. DDGS.
Weather concerns were also the major supportive influence in the U. S. markets during the week, taking soybeans, corn and wheat all higher. Weather patterns over the next month will do much to determine just how large the U. S. corn and soybean crops will be. The resulting uncertainty was causing some risk premiums to be built into futures. However, crop conditions aren’t really all that bad in the U. S., and the likelihood of fairly large production could see profit-taking come forward in both of those markets.
Wheat futures saw the largest advances during the week, with that strength stemming from mounting concerns about the wheat crops in Europe and the former Soviet Union. While many Canadian farmers continue to deal with excessive moisture issues, the problem on that side of the Atlantic is excessive heat and a lack of moisture.
Some estimates out of Russia have called the current conditions the worst drought in 130 years, and at least 14 districts in the country, which account for 15 per cent of the agricultural area, have declared a state of emergency.
Russian government officials downgraded their expectations for the size of this year’s grain crop to 85 million tons, from previous estimates of 90 million tons, and 97 million a year ago. While officials in the country have made assurances that production will still be enough to meet the domestic demand, Russia may not be as large of a competitor in the export markets as it has been in recent years.
For the European Union, wheat, barley, and durum production estimates were all being revised lower given the poor growing conditions. A report from the French Strategie Grains put out during the past week pegged total soft wheat production in the EU for 2010-11 at 129.5 million tons, which would only be 300,000 tons behind the year-ago level. However, if the heat persists with no respite, those figures could see some further downward revisions. Total grain production in the EU is currently forecast to be down by four per cent on the year.
That hot, dry weather cutting into wheat production forecasts is also detrimental to rapeseed crops in Europe, and Matiff rapeseed futures have climbed sharply higher in recent weeks. Even with canola climbing the way it has on the back of our own weather problems, the spread between the European and Canadian prices was said to have been on the wide side, adding fuel to the upward fire.
Shifting weather forecasts should remain a dominant market-moving factor in all of the commodities, at least over the next month as farmers across the Northern Hemisphere deal with their own production problems and analysts work to crunch the numbers.
– Phil Franz-Warkentin writes for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.