Pre-seeding risk premium being built into canola

The nearby May and July canola contracts on the ICE Futures Canada trading platform suffered some minor declines during the week ended April 5, while the remainder of the futures saw small to modest advances. Profit-taking sparked some of the losses in the two nearby futures, as did an increase in hedge selling by grain companies.

Sentiment that demand is now shifting to new-crop months also helped to weigh on the two old-crop contracts. A lot of the action that was seen in the May future reflected the rolling of positions out of that month and into deferred contracts.

Support in canola continued to stem from the record usage of the commodity by the domestic and export sectors. The building of a risk premium into the deferred values was also evident, as the industry takes precautions ahead of the growing season. There were ideas that the dryness that existed on the Prairies heading into spring seeding has been alleviated to some degree. However, any extended periods of dryness during the critical development months in July and August will reduce the yield potential of the crop.

Some concern has already been expressed about the record area that will be seeded to canola this spring, but others are indicating the large acreage will be required to meet demand commitments.

Canola area in Western Canada is expected to range anywhere from 21 million to as high as 23 million acres this spring. In 2011, canola area totalled 18.9 million acres.

The industry is hoping canola-seeded area is at least in the 21-million-acre range. Statistics Canada will release its first plantings survey on April 24, but participants are already writing the numbers off as the survey will not fully reflect actual acreage. Most believe the survey was conducted too soon, and will underestimate what producers plan on seeding.

Activity in the milling wheat, durum and barley contracts on the ICE Futures Canada platform remained virtually non-existent. Most of the price action was again tied to arbitrage by ICE Futures Canada and was dependent on the placing of bids or offers by commercials.

Chicago Board of Trade (CBOT) soybean futures posted advances during the period ended April 5. Fallout from the U.S. Department of Agriculture’s March 30 prospective plantings report continued to generate strength, as did ideas that old-crop stocks of the commodity are tighter than what the USDA is suggesting.

Additional strength in U.S. soybeans came from further downward revisions to the soybean crop size in both Argentina and Brazil during the week. The production declines, along with the reduced U.S. soybean area, were expected to further tighten the global oilseed supply situation.

The upside in soybeans was tempered by ideas that values were overbought and were in need of a downward correction.

CBOT corn futures also experienced gains, with old-crop values leading the upward price climb. Support in the nearby months was associated with the extremely tight old-crop stocks picture. The advances in new-crop contracts were restricted by the expectation of record area being planted to the crop this spring by U.S. farmers.

Wheat futures at the CBOT and Kansas City Board of Trade were lower on the week while wheat values at Minneapolis’s MGEX saw some small gains. The arrival of beneficial precipitation in the U.S. winter wheat belt stimulated the selling that weighed on KCBT and CBOT wheat values. The improved weather conditions for the European wheat crop also influenced the downward price action.

Much of the support at the MGEX continued to reflect the USDA prospective plantings report that expected spring wheat acreage in the northern-tier states to be down significantly from the year-ago level. Early ideas had called for an increase in area to spring wheat.

November rising

In hopes of not cursing the recent rally in canola by talking about it, there are again ideas circulating that values have the potential to move to the $700-per-tonne level.

For some of the analysts making projections at the farm meetings held each spring, the $700 projection has been seen more as a joke than reality. However, with canola’s recent move to current levels, the projection of $700 may not be as far fetched as once thought.

Granted, the focus on which contract will push to that level is still up for debate — but for the sake of discussion, the November future will be the month that makes the run for that price, or not.

The May future is about to become a cash delivery month, which then leaves July. However, while July will be active, most market participants will look to the November contract, where open interest is already overpowering all the other months.

The potential upward price push for November canola is backed by the tightening global oilseed supply situation. That view is associated with the declining size of South American soybean crops, where output in both Brazil and Argentina is deteriorating as more is known about the harvest. Palm oil futures in Malaysia have been steadily moving to new highs given that stocks of that commodity are also tightening.

U.S. soybean production is also far from certain, and while area planted to the crop this spring in the U.S. will be larger than what USDA forecast at the end of March, it may still be short of what was planted a year ago. Any issues with the development of that crop this spring will only serve to bolster global oilseed values.

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