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Canola’s highs appear to be in for the summer

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ICE Futures Canada canola contracts bounced around during the week ended May 25, initially posting declines before climbing back to finish with small gains in most months by Friday.

The bounce on Friday could be seen as supportive from a technical standpoint, but the general consensus right now seems to be that the highs are in for the summer and that any attempts at gains should be seen as good selling opportunities.

The theory is that inevitable weather scares and sporadic good news on the economic front should provide occasional support, but the expectations for large North American crops and the general uncertainty with the global financial system will keep the path of least resistance to the downside.

Milling wheat, durum and barley futures saw some light commercial activity during the week. Canadian wheat futures climbed sharply higher, playing catch-up with the U.S. wheat market that posted its gains earlier in the month. Barley edged slightly lower.

In the U.S., the first week of nearly round-the-clock trading hours at the Chicago Board of Trade saw corn and wheat end lower, while soybeans were mixed. The general sense of economic uncertainty pervading many markets had investors bailing out of riskier assets across the board during the week; that selling spilled into the grain and oilseed futures as well. News that China was cancelling some soybean purchases also weighed on old-crop prices.

However, new-crop soybeans managed to finish the week higher, while the losses in the new-crop grain contracts were less severe. Attention in those deferred positions will focus squarely on weather conditions going forward, with any threats to U.S. yields expected to provide some support. However, just as with canola, the pessimism in the outside economic markets will continue to overhang the futures.

Record expected

Agriculture and Agri-Food Canada released updated supply/demand estimates during the week, forecasting canola production this year at 15.1 million tonnes. While that’s a little lower than earlier estimates, if realized it would still be a new record by about a million tonnes.

At the same time, exports and the domestic crush are forecast to remain solid, and the Agriculture Department now predicts two years in a row of ending stocks of 600,000 tonnes.

The general rule of thumb in recent years has been that ending stocks below a million tonnes would be considered tight, but that low level hasn’t been seen since 2004 when production was about half the current levels.

Much has changed in the industry over the past eight years, and end-user demand is also expected to be about double what it was back then.

Global canola/rapeseed stocks are also expected to be much tighter by the end of 2012-13, which bodes well for canola prices from a fundamental perspective.

The European Union’s rapeseed crops, which are seeded in the fall, suffered from adverse weather conditions over the winter, which has caused production estimates to steadily decline from the region. Oil World, the Hamburg-based international forecaster, recently pegged rapeseed production in the EU this year at 18.1 million tonnes. That would be the smallest crop in six years, and well below the 19.1 million grown in 2011. Ukraine, which is a major supplier for the EU, is also expected to have a smaller crop, according to Oil World.

“This will raise the global dependence on Canadian and Australian rapeseed and canola export supplies, and will keep prices of rapeseed and canola well supported,” said the company.

A separate report from the Australian Oilseeds Federation warned that dry conditions in the eastern parts of the country were threatening the establishment of canola crops there. In its first production estimates of the year, the federation estimated Australian canola production in 2012-13 at 2.965 million tonnes, which would be down slightly from the 3.185 million grown in 2011-12.

One of the largest customers of Canadian canola in recent years, China, is also one of the world’s largest rapeseed producers and production there is forecast at 13 million tonnes, which would be unchanged on the year, according to the U.S. Department of Agriculture’s data.

However, if ending stocks of 600,000 tonnes are considered tight in Canada, the USDA carry-out projections for China look very supportive for prices at first glance. USDA forecasts canola/rapeseed stocks in China as of September 2013 of only 134,000 tonnes, which would compare with 1.424 million as recent as 2011.

About the author

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

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