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Risk-off trade sentiment outweighing market fundamentals

Crops still out on the fields cast clouds over StatsCan’s latest data

The novel coronavirus epidemic accounted for many of the headlines moving the grain and oilseed markets during the first week of February, with traders uncertain over what the outbreak will do to the global economy and demand for food.

China is a major driver of international markets, and an economic slowdown there will cause ripple effects elsewhere. Equity, energy and commodity prices were all trading off of the fears, bringing an extra layer of uncertainty to grains and oilseeds, which saw some wide price swings during the week.

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People still need to eat at the end of the day, which may limit the overall impact of the virus on agricultural commodities. However, supply/demand fundamentals may take a back seat to the broader day-to-day trade sentiment as the virus runs its course.

Activity in the U.S. soybean market often sets the tone for Canadian canola, and beans are especially linked to Chinese demand. The recently signed Phase 1 trade deal between the U.S. and China includes promises from China to increase purchases of U.S. agricultural goods. However, those promises have yet to materialize in export data, and the coronavirus may provide enough of a reason to lower the optimistic targets.

Canada’s own canola business to China remains in limbo. Total Canadian canola exports during the crop year to date, of 4.6 million tonnes, are running about 400,000 tonnes behind the previous year’s pace, according to the latest Canadian Grain Commission data. While some countries have increased their purchases on the year, the lost Chinese business has not been totally covered elsewhere.

Speaking before a House of Commons committee tasked with evaluating the relationship between the two countries, Canada’s new ambassador to China, Dominic Barton, acknowledged China’s restrictions on Canadian canola were a “punishment” for Canada’s own role in detaining Huawei executive Meng Wanzhou.

Looking beyond politics, Canadian canola stocks, as of Dec. 31, 2019, were pegged at 14.3 million tonnes by Statistics Canada in a report released Feb. 5. That was down slightly from the 14.6 million tonnes on hand at the same point the previous year, but still about 700,000 tonnes above the five-year average.

While the December stocks data is often used to help confirm production and usage estimates, this year’s report does not shine much light due to the large amount of unharvested crop left in the field this past fall. Analysts estimate anywhere from one million to two million tonnes of canola could still be harvested in the spring, which would raise the overall supply considerably.

From a technical standpoint, March canola touched a contract low of $448.50 per tonne on Feb. 3, but climbed by roughly $10 per tonne over the next few days.

While a retest of that support level is possible, it would take an outside influence to pressure prices much lower, as canola looks rather cheap compared to other oilseeds. Crush margins have come off their recent highs, but remain at historically solid levels near $100 above the futures.

About the author

Columnist

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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