ICE Futures Canada canola futures continued to break into new bullish territory during the week ended Aug. 6, with the most actively traded November contract gaining $10 to close at a fresh contract high of $469 per tonne.

Winnipeg canola futures picked up technical momentum on price charts during the week. Talk of fresh export demand and gains in competing oilseed markets (CBOT soy, EU rapeseed and Malaysian palm oil) helped lift canola futures.

The key supportive feature to all grain/ oilseed markets was bullish speculative spillover impetus drawn from the wheat markets. And that will be the highlight of this report.

Indications Mexico contracted some fresh export business for Canadian canola for an unspecified delivery period heightened commercial buying interest. Steady domestic crusher demand and pricing of old export business to Japan were also noted.

Continuing concern about growing conditions for canola in Western Canada also helped to generate underlying support. Reports of EU rapeseed production woes also remain a constant worry, helping to sustain price uptrends.

The gains in canola were restricted by steady elevator company hedge selling, with producers continuing to be good sellers into the cash pipeline. Firmness in the Canadian dollar also limited canola gains.

Chartwise, the November canola contract this week managed to close above chart resistance at $460 per tonne, with the next upside target pegged off the weekly chart at $480, established in May 2009.

Also of technical interest, on the November daily chart, using the bull flag technical measure from the first rally phase (June) suggested a technical target of about $460 per tonne. Now, with another possible bull flag in place at the end of July, the next technical target measure could conceivably be argued at $495.

For three-times-daily market reports from Resource News International, visit “ICE Futures Canada updates” atwww.albertafarmexpress.ca.

Shades of 2008

My attention and that of all grain traders these days now turns to wheat. It was a simply stunning rally in wheat markets over the past month, but especially exciting over the week ending Aug. 6, bringing back ideas of the wild markets of 2008.

Limit-up (or near to it) gains posted in U. S. wheat futures Thursday (Aug. 5) and a steady series of strong gains in the lead-up through the week. But there’s a nagging feeling about the sustainability of such dramatic upward momentum. On Minneapolis December spring wheat futures, for instance: a rally of $2.70 per bushel since the June 29 low, with the contract knocking on US$8/bu. (up 47 cents on Aug. 5 alone, to $7.92-1/2).

The big news involved reports of Russia banning grain exports starting Aug. 15 until Dec. 31. That’s going to include wheat, corn, barley, rye and flour.

Ukraine, another major exporter, also has cancelled several wheat export contracts due to lack of supply from farmers and other issues. That’s admittedly big news and has heightened fears about tightening supplies because export restrictions in the former Soviet Union helped shove prices to record-high prices in early 2008.

Such news has again sparked a frenzy of buying as traders anticipate more export business for the U. S., and for anyone else with wheat to sell, including Canada. Plus, speculative money continued to aggressively chase the long side of the market. Momentum has definitely favoured the bulls to this point.

But bull markets must be fed a constant dose of supportive news. Without fresh bullish news, the market could be vulnerable to profit-taking as futures are heavily overbought.

On Friday, Aug. 6, Chicago wheat saw its heaviest trading level ever and prices dropped the 60-cent limit as investor funds unloaded contracts.

So with wheat futures having soared to their highest levels in two years in such a short period of time, one has to wonder about sustainability of this rally, and when the top or even corrections comes, it could be harsh.

Stocks much higher

The wheat supply situation doesn’t appear to be as dire at it was in 2008, when crops failed worldwide and wheat prices rose to record highs. Wheat stocks are much, much higher than in 2008.

The International Grains Council (IGC) production forecast is still the third-highest on record. And in the U. S., where good weather is boosting this year’s harvest, wheat stocks are at a 23-year high. U. S. inventories had dropped to an all-time low in 2007-08. That’s not even close to being the case this year.

So then, this latest price spike probably says as much about heightened speculative investor sensitivity to extreme scenarios plus an increased desire to chase apparently juicy trades, as it does about the prospect of food shortages.

And in the midst of this highly charged speculative environment, it is impossible to predict with any certainty where wheat prices will go in the weeks and months ahead. Could be up sharply yet but wheat could lose momentum quickly and at any time.

And with U. S. wheat futures markets posting their largest monthly percentage gains in 50 years, the Canadian Wheat Board is also alerting farmers of potential pricing options to lock in some of the current rally. If the rally turns out to be short lived, it won’t be reflected in the annual pooled price.

Mike Jubinville is a grain market analyst with ProFarmer Canada in Winnipeg and writes for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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Weather issues, both in Canada and Europe, continue to provide support, though with nearby Nov. canola futures rallying $83 per tonne since the start of June, a large measure of Canadian production problems has now been incorporated into the current market. In fact, trade sentiment is now starting to shift that 2010 Canadian canola production has stopped deteriorating and perhaps crop size may be starting to move up from earlier discounted ideas.

That could also be the case with the European rapeseed crop where continued dry conditions have stressed output there, but perhaps not as badly as earlier indications suggest.

Nonetheless, price trends in both markets have not given any solid indication of topping at this time. But unless new threats to production arise, look for some possible corrective price action lower sometime in the immediate weeks ahead. Downside price risk though remains limited given ongoing production uncertainties.

Price charts at the present time remain bullish, certainly with recent buy stops hit following the Nov. canola contract breaking above $440/tonne. Currently the Nov. is meeting chart resistance at about the $460/tonne mark – considered a technical swing target on the charts.

Gains in Chicago soybeans, improving global economic sentiment, and still a soft tone to the Canadian dollar added to the positive momentum we have seen in canola. Fresh export pricing was also said to be taking place, possibly to China, although there was no confirmation.

Farmer selling, encouraged by the recent advances, has tempered the upside in canola though. Ideas that the market may be vulnerable to a profit-taking correction also helped keep the advances in check.

Also something of note: chart seasonals for both soybeans and canola have a tendency to turn lower at some point in the June/July time frame. But so far, market bulls remain in control.

Western barley futures remain steady, with an upward bias, though open interest has been stagnant. Cash feed barley markets have ticked slightly higher. But the upside is still seen as limited by the likely abundance of competing feed ingredients this year, such as wheat and U. S. DDGS.

Chicago soybean futures at the Chicago Board of Trade have rallied sharply over the past two weeks, but prices have stabilized at the springtime highs. November bean futures managed a test in the past week up to the US$9.90/bu high posted in April, but has since stalled and corrected slightly lower.

Weather market

Weather uncertainty for the U. S. Midwest growing season remains a key supportive influence with the bean crop’s critical pod-filling stage still ahead in August. Tight old-crop supplies and steady demand from the export sector has also helped hold prices in the upper end of established longer-term trading ranges.

But with near-term Midwest weather forecasts generally favourable, some of the immediate risk premium has been withdrawn from the market. The nearterm forecast calls for a near-daily chance of rain, which has limited concerns about warmer temperatures.

Chicago corn futures also managed to rally up to four-month high territory over the past two weeks. But like soybeans, corn has taken a bit of a consolidative break over the past couple of trading sessions. Much of the recent strength in corn had been associated with spillover gains seen in CBOT wheat values. Some weather-related issues helped to fuel some minor buying interest. Strength in the energy sector was also an underpinning price influence.

But the corn rally has softened as nearterm weather forecasts have moderated the previous hot/dry sentiment. Forecasts now call for generally moderate temperatures. But while temperatures were still expected to heat up to above-normal levels last week, above-normal rainfall was also expected, which is generally supportive as U. S. corn crops progress rapidly through the critical pollination phase of development.

Wheat rally

U. S. wheat markets have demonstrated surprising upside price leadership over the past three weeks, now testing highs last seen back last November. While production issues are lowering crop prospects in Canada, northern European and into Russia have served as well-advertised fundamental catalysts for the rally, there is a sense in the marketplace that much of the upward momentum has been generated by speculative short-covering, more so than that fundamental-based bullishness.

And when the speculative fund sector is in the process of liquidating or establishing a position, there is a risk of price moves being exaggerated; this is where we feel the market is today. Export sales internationally remain rather slow, with price activity in the physical cash markets not reflecting a sense of panic by end users.

Therefore, the wheat market seems to have made the switch from being overly bearish to bullish too quickly and likely needs a period to correct lower before upside momentum can be sustained.

But for the moment, price charts remain pointed higher until this speculative-driven buying momentum exhausts itself.

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Downsidepricerisk thoughremainslimited givenongoingproduction uncertainties.

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While that’s the view today, the trade must be impressed with MGE Dec. wheat futures which have in quick order been able to blow through and above significant chart resistance at the US$5.70/bu area and now beyond psychological resistance at US$6.00/bu.

Wheat futures lately have been energized by downwardly revised production estimates for Russian and European wheat harvests. The threat of reduced world production, with Russia reportedly having its worst drought in 30 years or more, rekindled bullish momentum, and sellers seem unwilling to aggressively step in front of the upward trend at this time.

Concerns over output from the European Union’s second-largest wheat producer increased after Deutscher Raiffeisenverband, the German farm co-operative, cut its German crop forecast by 11.1 per cent to 44.2 million tonnes. Meanwhile, there is increasing concern that Russia’s grain production will fall short of the government’s revised forecast of 85 million tonnes.

I’m still of the opinion though that world stockpiles of wheat remain ample and U.S. wheat stock projections are burdensome with wheat futures lacking sufficient fundamental reason to justify its surprising strength. This rally in my opinion remains primarily driven by speculative money flow and has become overbought after an impressive two-week rally.

U.S. wheat ending stocks supplies, projected in 2010-11 at a massive one billion bushels ( a 23-year high) and a stocks-to-use of almost 50 per cent, yet MGE Dec futures have rallied $1.06/bu higher since June 29, and outperforming both corn and beans.

But perhaps the bearish sentiment that has prevailed in the wheat market for so long simply has too many spec traders leaning the wrong way, and they now feel the pain in trying to cover short positions as margin calls escalate…especially now at a time when questions begin to arise about the size of crops growing in export competing nations.

Fundamentally the wheat market remains bearish, but that has been talked about for so long that traders seem uninterested. This creates a situation where the divergence between the two sides of the market continues to grow, a situation that normally ends with the market returning back to its fundamentals at some point. Rallies would appear to remain selling opportunities. But nonetheless, this has emerged into a rally that must be respected.

Mike Jubinville is an analyst with ProFarmer Canada

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