Canola cools off as Canada’s crushers curb demand

Canola futures on the ICE Futures Canada trading platform managed to hold on to small gains during the week ended March 2. Fresh export demand from Mexico, along with some pretty good chart-based speculative demand, facilitated the upward price action.

Concerns about dry conditions heading into spring seeding on the Prairies helped to influence some of the gains. Some spillover from the advances seen in Chicago soybean values also kept a firm floor under canola values.

The upside in canola was restricted by the upswing in the value of the Canadian dollar, with the currency moving well above parity with the U.S. unit during the reporting period.

The advances in canola were also curbed late in the week as demand from the domestic processing industry began to fade amid deteriorating profit margins.

The new milling wheat, durum and barley contracts being offered by the ICE platform experienced some price action during the week, but there was little in the way of any volume. Most of the price action occurs via arbitrage by ICE and is dependent on the placing of bids or offers.

Activity in western barley futures on the ICE Canada platform also remained non-existent. Cash bids for barley in Western Canada held steady at firm levels.

CBOT (Chicago Board of Trade) soybean futures rallied during the period ending March 2. Much of the support was associated with the idea that a smaller Brazilian soybean crop will result in China looking to the U.S. to cover that country’s production shortfall. There was confirmation of some fresh Chinese demand for U.S. soybeans seen.

Support in soybeans also came from chart-based speculative fund demand as well as from the need to keep prices strong in order to encourage U.S. producers to plant the crop this spring instead of corn.

Informa Economics projected Brazilian soybean output at 68 million tonnes, which would be down from the U.S. Department of Agriculture’s recent 72-million-tonne forecast. However, while Brazil’s crop may indeed be a bit smaller than first anticipated, Argentina’s soybean crop was pegged by Informa at 47.5 million tonnes, up one million from its previous estimate.

The upside in soybeans was capped by profit-taking as well as by sentiment that values are overbought and in need of a downward price correction.

CBOT corn futures experienced small advances, with the gains in soybeans spilling over to generate some of the upward momentum. Some chart-related demand and firmness in the cash market also contributed to some of the price strength. Tight old-crop supplies also provided some support for the nearby months.

The upside in corn was difficult, given that acreage to the crop was seen coming in at record-high levels this spring. Overbought price sentiment was also a limiting price factor. Reports that the ethanol industry in the U.S. is cutting back on production further restricted the upward price action.

Wheat futures at the Chicago, Kansas City and Minneapolis exchanges posted small to modest advances during the week. The buying back of previously sold positions fuelled some of the price gains. However, spring wheat prices in Minneapolis led the upward price move.

Advances at the MGEX were spurred on by ideas that U.S. spring wheat acreage would be down significantly as producers in northern-tier states look to alternative crops with better financial prospects, including corn.

Crushers crunched

There has been much discussion over the demand coming from domestic crushers in Western Canada for canola during the past week or so. Some participants have indicated that with the rise in the value of the Canadian dollar above parity and the declines in U.S. soyoil, that profit margins for Prairie processors have deteriorated significantly.

Individuals in the crush industry indicate that domestic processors start losing money when margins drop into the $60- to $75-per-tonne range. Values arguably have been running in the $80-$100 range over the past couple of months, but have since declined to the break-even point.

The crush pace in February was definitely in the “torrid” category based on feedback from the industry and helped push domestic usage numbers to near-record levels.

However, with the profit margins for processors declining, there are ideas that the demand from this sector will be significantly lower in March and in coming months.

The basis being offered by crushers in Western Canada has already begun to widen out despite the fact the value of canola futures have been steadily rising — a sign that demand is beginning to slow.

There were also indications that domestic crushers have now covered their processing commitments through to autumn.

However, some individuals argue that the softening demand from the crushers will only be temporary and that once processors have adjusted for the higher costs, they will be aggressive buyers again as they have sales on the books that need to be covered.

In keeping with the domestic crush industry, current processing capacity in Canada is sitting at roughly 8.5 million tonnes. Participants are already forecasting that another 300,000 to 400,000 tonnes of capacity will be added to that total in 2013.

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