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Canola Bulls See Grey Skies Ahead

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Canola futures on the ICE Futures Canada trading platform posted solid advances during the week ended July 9 with gains coming on the heels of the reduced production prospects for the crop. The penetration of key technical resistance in the November contract also helped to propel prices to the upside.

Some of the support in canola was also stimulated by the uptrend seen in Chicago Board of Trade (CBOT) soybean values.

Firmness in the Canadian dollar, a pickup in elevator company hedge selling as producers began to deliver canola when cash bids neared $10 a bushel, and profit-taking helped to restrict the advances.

CBOT soybeans rallied on the tight old-crop supply situation and an unexpected pickup in export demand, most notably China. The lack of any bearish data in the U.S. Department of Agriculture’s supply/ demand report on July 9 also helped to bolster prices. Uncertainty about the weather outlook, and the impact of those conditions when U.S. soybeans go through their critical pod-filling development stage in August, also provided support.

CBOT wheat futures climbed significantly in response to reports that the wheat crops in Europe and the former Soviet Union were struggling with dryness. When combined with the reduced wheat production prospects in Canada, wheat futures in Chicago soared upward. Some of that buying was believed to be the covering of previously sold positions.

Much of the upward price action seen in CBOT corn was tied to the spillover buying from the advances seen in wheat. Some weather concerns also helped to lift corn values.

Interpretation

There is no question that weather concerns have taken over the direction of canola futures and remain the dominant conversation among analysts and producers alike.

While the general consensus is that a lot of canola area was left unseeded this spring, exactly how much canola across the Canadian Prairies has been negatively impacted by the continuation of wet conditions is still subject to interpretation.

There definitely are some big problems out there and the damage from the seemingly never-ending supply of precipitation is extensive. In conversations with producers in different parts of the Prairies, a three-week break from the rain combined with some sun and warm temperatures would go a long way toward bringing crops that are just barely hanging on back into the fold and result in at least average if not a bit better production.

Analysts are also trying to determine whether the areas in which canola has experienced excellent growing conditions will offset the regions in which canola fields are in trouble.

The bulls in the canola market are also pointing out that there are still plenty of weather threats that lay ahead for canola, including insects and disease, with many producers not being able to spray because of the excessively wet conditions. The late development of crops and the potential for an early frost also continue to loom.

Some individuals expecting the worst have already reduced Western Canada’s canola output by at least 30 per cent and were expecting that percentage to decline further.

Based on the 30 per cent production drop and original thoughts that output would be in the 13 million-tonne range, that would put the canola harvest at just over a projected nine million tonnes.

However, the bears in the market continue to point out that it’s hard to write off the crop, given the repeated number of times the canola crop has faced dire straits during the growing season only to result in larger-than-expected production.

As a result, these individuals are still thinking production will come in at a level above 10 million tonnes.

Expectation

In fact, the market analysis branch of Agriculture and Agri-Food Canada, in a supply/demand update July 8, actually came up with a production forecast that took into account unseeded area and damage to the canola crop from the wet weather.

The government agency pegged 2010-11 Canadian canola output at 10.5 million tonnes. This compared with the May forecast of 11.7 million tonnes and the 2009-10 projection of 11.825 million.

AAFC also saw fit to reduce its 2010-11 canola ending stocks forecast to a very tight 750,000 tonnes. In May it was expecting 2010-11 canola carryover to come in at 1.049 million tonnes. In 2009-10, ending stocks of canola are seen coming in at 1.3 million tonnes.

While the odds of canola futures hitting the $500 per tonne level may have been pretty slim just a few weeks ago, the fact the November future is on its way to test $460 is a clear indication that the uptrend in the commodity is far from over. However, a key thing to remember is that for every upward bounce in canola values there is always a small pull-back.

Whether canola actually makes it to $500 will depend on the bulls being right about the reduced canola yield potential and how aggressively end-users move to cover commitments before rationing that demand.

Dwayne Klassen writes for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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