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Fewer U.S. soybean acres bode well for canola

ICE Futures Canada canola contracts climbed sharply higher during the week ended March 30, hitting their strongest levels in over six months and settling just below contract highs on Friday. Canola first rose on the back of the tightening supply situation in Western Canada and solid export demand, but saw another leg up when a much anticipated U.S. Department of Agriculture report provided a bullish spark for soybeans south of the border.

The USDA forecast soybean plantings in 2012 at 73.9 million acres, which was well below average trade guesses for a 75.5-million-acre crop and about a million acres smaller than the year-ago level. The trade was quick to point out that actual acres will likely be larger, as the rally in soybeans over the past month will swing some area its way, but the initial bullish reaction in the futures was swift.

With South American soybean production failing to live up to expectations this year, the world is banking on a larger U.S. crop to cover some of the slack. However, with the corn market also working to draw in acres, any limitations on U.S. soybean area bodes well for canola prices.

In Western Canada, all signs point to the largest sea of yellow in history this summer. The largest official industry guesses have topped out at 22 million acres, well above the 18.9 million seeded in 2011 — and already an unprecedented number. However, anecdotal reports now point to canola plantings at 23 million acres or more. The excessively wet land in Saskatchewan and Manitoba that was unseeded last year could be up to 75 per cent canola if some reports are to be believed. Seed dealers are said to see dozens of farmers come in on a daily basis to exchange seed for canola. There is also plenty of talk in the market of more farmers than normal looking to seed canola on the same ground they seeded to the crop last year.

Rolling the dice

That canola-on-canola crop rotation poses disease and yield risks. However, when the price is right, that seems to be a risk many will be willing to take this spring. From a monetary perspective, growing canola this year could conceivably boost profits by $100 per acre compared to wheat or barley.

Those large acres are overhanging the market, but canola supply/demand in itself won’t dictate the price, as the crop is a small player in the global oilseed market. That means even if the canola crop does end up as huge as is being forecast, prices could still stay firm if soybeans hold up. Some luck will be needed, but there is always an element of rolling the dice each spring.

The rally in canola does raise some concerns that the market is becoming overbought. That may be true on the old-crop contracts, but when you look at new-crop prices, canola still looks attractive from an end-user’s perspective. Crush margins against the nearby futures are at their lowest levels in a few years. However, when calculating the margins — which basically work out to the difference between the seed cost and the product values — the new-crop prices still look very profitable for the crushers.

While the oilseeds were rallying, corn futures in the U.S. actually moved down slightly on the week. The USDA forecast U.S. corn plantings at 95.9 million acres, which easily surpassed trade guesses and would be the largest crop since 1937. Tight nearby supplies mean that increase will be needed, but profit-taking was enough to keep some pressure on values during the week.

What could prove interesting from a Canadian perspective in the USDA plantings report was the smaller-than-anticipated spring wheat estimate, at only 12 million acres. After poor conditions limited some plantings in the northern states last spring, the general consensus had been for a million-acre increase from the 12.4 million acres of spring wheat grown in 2011.

Minneapolis wheat futures led to the upside in the U.S. during the week, and the ICE Futures Canada milling wheat contracts actually saw some light commercial trade as well.

U.S. durum acres are expected to increase to 2.2 million, from 1.4 million in 2011, with crop insurance programs offering good returns for the crop.

About the author

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Phil Franz-Warkentin - MarketsFarm

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

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