Old-crop canola contracts resist downward pressures

ICE Futures Canada canola contracts started the week ended March 23 strong, but finally ran into resistance to post their first weekly declines in nearly two months in the old-crop contracts. However, even the correction lower was short lived, as Friday saw the market attempt to retest those earlier highs.

Overbought price sentiment and pent-up profit-taking was behind the selling in canola, with similar losses in the CBOT (Chicago Board of Trade) soy complex triggering the declines in canola. However, the underlying fundamentals remain quite supportive for the Canadian oilseed and, aside from technicals and outside influences, there are more bullish than bearish factors at play in the market.

With exports and the domestic crush both running at record pace, the concerns over tightening stocks are keeping the end-users as active buyers in canola. That end-user demand is evidenced by basis levels across Western Canada that continue to offer very good pricing opportunities and are still above the futures in many locations.

Canola is definitely the crop of choice this spring, and some industry participants predict acres could top 22 million. Even a more conservative 19-million- to 20-million-acre crop would still be a record, but the fact is — the industry needs that production.

Agriculture and Agri-Food Canada now projects carry-out supplies from the current crop year at about 700,000 tonnes of canola, which would be well below the one million tonnes generally seen as a “comfortable” level for the end-users. Domestic crushers have already crushed 500,000 more tonnes of canola to date than they did at the same point the previous year, despite any softness in crush margins.

Exports are even more impressive, running about 1.5 million tonnes ahead of the year-ago pace, according to the latest Canadian Grain Commission data.

After a couple of disappointing years, where adverse conditions in the spring thwarted some seeding operations, early indications in 2012 point to some favourable planting weather in southern Manitoba. Seeding early does create some risks from a weather standpoint, as frost is still very much a concern. However, it will be interesting to see how many producers are willing to take a bit of a risk this year, especially as the dwindling stocks outlook would seem to suggest any canola harvested earlier this year would be met with strong demand in the summer months.

From a technical standpoint, the May canola contract ran into some firm resistance as it failed to hold on to its brief gains above the psychological $600 level. After clawing back from the profit-taking losses, a move back above that chart point could set the stage for more speculative buying. However, if canola fails to see a sustained move higher, there is also a case to be made for a further correction lower — at least in the short term.

Milling wheat and durum futures did see some very minimal activity during the week, moving down in wheat and up in durum. However, the new grain contracts are still far away from being considered liquid. While the contracts have been on the board for two months now, with little to show for it, only new-crop futures are available and the activity is still expected to pick up once there is actually a crop to trade.

In Chicago, soybeans, corn and wheat all ended the week lower, with the largest losses in corn. Profit-taking on recent gains was the feature. However, talk that any declines were only making soybeans and corn more attractive to Chinese buyers, who are rumoured to be looking to make more purchases, did provide underlying support.

Fight for acres

Positioning ahead of the U.S. Department of Agriculture’s March 30 prospective plantings report was also a feature.

The report will be closely watched, and is expected to set the nearby tone in the U.S. grains and oilseeds as both corn and soybeans remain firmly entrenched in their annual fight for acres. Weather conditions across the U.S. Midwest are said to be fairly conducive toward an early start to spring seeding. Early seeding would favour more corn acres, which is likely why corn fell to a greater extent than soybeans during the past week. The USDA recently predicted corn area at 94 million acres, which would be the largest since the Second World War. Private forecasts leading up to the March 30 report have speculated actual seedings could top 95 million, or more.

The USDA will also be releasing updated supply/demand tables on March 30, and traders will be following those numbers closely for a better sense of usage in corn and soybeans. Some analysts have expressed concerns that ending stocks may end up tighter than the USDA has said in the past, especially if production issues in South America swing more demand to the U.S.

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