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Oilseed market fundamentals take a back seat, for now

ICE Futures Canada’s canola futures consolidated within a very narrow range during the week ended Nov. 23, as the U.S. Thanksgiving holiday saw grains and oilseeds on both sides of the border take a little breather.

It’s that time of year when actual canola-specific fundamental news is hard to come by, which means technical signals and outside markets will likely take precedence in dictating where values go heading into the new year. Canada’s smaller-than-expected canola crop has been priced into the futures for some time already, but will remain a supportive factor — especially if farmers remain reluctant sellers of what’s available. On the other side, predictions of record-large soybean crops in South America are definitely a bearish factor overhanging the oilseed markets. Global economic uncertainty, and the potential for a speculative sell-off in the financial markets, is also something percolating in the background.

The Canadian dollar strengthened by about a cent relative to its U.S. counterpart during the week. While the January canola contract was down 80 cents on the week in Canadian dollars, when calculating that in (the now-cheaper) U.S. dollars, the contract actually improved by US$5 per tonne.

The lightly traded grain contracts in Winnipeg did see a little bit of price movement during the week, with wheat moving down and durum holding relatively steady. Volumes are still far from being considered liquid.

In the U.S., trade was subdued during the week as traders there turned their attention to turkey, football and Black Friday deals on flat-screen TVs.

Soybeans, corn and wheat were all higher, with improving export demand for all three commodities, bullish technical signals, and the weaker U.S. dollar behind some of that strength. The lack of liquidity, due to the Thanksgiving holiday, exaggerated the price move during the week. South American weather conditions will be a major factor moving U.S. corn and soybean futures heading into 2013. Early indications call for bumper crops in the continent, which would reduce the demand for North American grains and oilseeds. However, supply/demand balance sheets are tight, which will mean any weather problems over the course of the growing season should be supportive.

Worsening drought issues across the U.S. grain-growing region remain a factor to watch in the grain and oilseed markets as well.

Over 60 per cent of the continental U.S. is now considered to be in some state of drought, with the most severe dryness found right in the heart of the Great Plains, according to updates from the U.S. Drought Monitor, which tracks moisture conditions across the country. That dryness is already causing concerns over the state of the U.S. winter wheat crop, and will pose problems for soybeans and corn next year if the situation doesn’t improve over the winter.

Aside from production issues, the drought is also raising concerns over grain movement in the U.S. The Mississippi River is the main transportation link moving grain from the Midwest down to export positions on the Gulf of Mexico. The river is now at historic lows, and extended forecasts are not looking promising. The northern reaches of the river freeze up over the winter months, but grain usually continues to move as you move south.

The big issue at present is a 200-mile stretch of river from St. Louis, Missouri to Cairo, Illinois, where levels are getting dangerously low for barge traffic. Barges are already loading at 75 per cent of normal, but the seasonal reduction of water flow from the Missouri River (which joins the Mississippi at St. Louis) may cause levels to drop too far to allow any movement at all.

That bottleneck on the river has a mixed effect on the grain markets. On the one hand, prices should conceivably go up if end-users are forced to move grain to export positions by truck or rail instead. The potential for a closure of the Mississippi has already been cited as a supportive price influence in the cash market, with some buyers looking to secure supplies while they can. However, the longer-term impact could be more bearish. If exports are hampered by issues along the river, that will cause ending stocks to grow — which would alleviate the concerns over tightening U.S. supplies.

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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