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Canola Market Should Go Down, But Doesn’t

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(DEC. 21)

Grain and oilseed prices at the ICE Canada futures market have dropped since my last column with the canola market pressured by the losses in the U.S. soyoil market and sluggish demand as we entered the Christmas period. Giving some support was slow farmer selling and a weaker Canadian dollar. Outright trading volumes were light. Exporters, crushers and speculators were buyers. Western barley futures were pressured by a lack of demand as moderating weather reduced livestock feed programs.

Chicago soybean and corn futures have also declined since my last column with soybeans seeing a big decline and corn down only modestly. Soybeans were undermined by profit-taking after reaching three-month highs, with the favourable outlook for a record large South American crop also weighing on prices. The firming U.S. dol lar prompted selling. However, demand remains strong as China made large purchases of U. S. soybeans. Corn futures saw smaller losses

than soybeans in a choppy trade as the large amount of unharvested U.S. corn and rising interest in U.S. corn in the export market gave support. Strong gains in crude oil also helped to lift the market. Ideas of large corn supplies and bearish technical signals limited the upside.

U.S. wheat futures were down moderately with some prices hitting their lowest levels since October. The ample global wheat supply and the lack of export demand for U. S. wheat undermined prices. However values did find support from Informa Economic pegging U.S. winter wheat acres at 39.4 mln, well below 2009`s 43.3 mln acres.


The canola market has had an amazing ride last year and it does not appear to be over. Canola started January at $436.50, climbing to $486.30 in June as weather caused some production concerns. However, as the harvest wore on and weather improved, prices were pushed down by talk of a bigger-than-expected crop. Reacting to crop size, prices hit the year’s lows at $370.30.

As we face the 2010 crop year the outlook for canola is quite uncertain. If you talked to most analysts or if you have been to a market outlook talk in recent weeks you would hear a fairly consistent outlook. “Canola is overpriced and is going to go down pretty hard yet this winter.”

They all have the same story. Production was much higher than expected at 11.8 mln tonnes and demand is being curtailed. The crush pace has been reduced by the salmonella contamination of canola meal which has cut into canola meal exports to the U.S. while China’s embargo against Canadian canola imports, because of blackleg, will reduce exports.

The Ag Canada canola supply-demand report that came out Dec. 15 is very close to most analysts’ forecasts. Ag Canada estimates that exports will fall to 6 mln tonnes from 7.9 mln tonnes last year and that domestic use (mainly the crush) will rise to 5.46 mln tonnes from 4.65 mln tonnes last year. Total use for 2009-10 will be 11.46 mln tonnes.

With production at 11.8 mln tonnes, 2009-10 canola ending stocks are set to climb to 2.15 mln tonnes from 1.66 mln tonnes last year.

The result will be that the higher canola ending stocks and the record-large South American soybean crop will push canola prices lower. Many analysts are surprised that canola prices have held in as high as they have.


So what is the reason that canola is holding above the $400 level and seems to want to actually rally?

Despite the fear of China withdrawing from the export market, canola exports are not lagging that much. They are only about one or two cargoes behind last year at the same time. On top of that canola export movement continues at a fairly brisk pace with 440,000 tonnes scheduled to move by Jan 10.

The crush pace has been lagging last year’s level by about 100,000 tonnes for several months. However with the increasing crush capacity in Canada we could quickly turn this around. Crushers have been solid buyers in the markets in recent weeks and Yorkton crushers are sourcing canola in Fort Saskatchewan, Alberta, 500 miles west.

Producers are also said to be supporting prices by holding canola. However, the Canadian Grain Commission weekly statistics show that, as of Dec 11, farmers had delivered 4.008 mln tonnes of canola, slightly ahead of 3.969 mln the previous year.

One of the popular explanations for the firm canola prices is that speculators, mainly commodity funds, have been going into the canola market because of the general bullishness of commodities in the face of the falling U.S. dollar. There has definitely been some fund buying in the market that has given support and more is expected in January.


Another interesting fact is that open interest (number of contracts in the market) has rebounded from the low after China embargoed Canadian canola imports. It is back close to the level it was at when China made its move. Who has come into the market in such an aggressive way? Are exporters or crushers covering their upcoming sales aggressively? Are speculators who are looking for a rally in the new year behind the increase in contracts?

Speculative accounts around the world are all hyping the fact that ag commodities are going to be very strong in 2010. Companies from Goldman Sachs to Deutsches Bank have been telling their speculators to get ready to jump on the explosion in prices they are forecasting for 2010.

So what to expect in 2010? Talking to several locals who used to trade on the “old floor” at the Winnipeg Commodity Exchange and still trade canola, they are aware that everything says canola futures should be heading down to $375 in Jan/Feb., but say the feel in the market is that prices want to go higher.

One analyst pointed out that when a market will not go down, no matter how much bearish news it faces, something is driving it higher and get out of the way because an explosive rally is coming.

One last thing to note is the fact that the chart patterns for canola prices are forming what is called a consolidating pattern and the intensity of this pattern is suggesting we are going to see a big move in canola prices soon, likely Jan or Feb, but the charts do not say whether it will be up or down.

I am not as convinced of a big rally as I was back in 2008, but I do feel we will see a price explosion yet, before prices back down. However I warn you that is a “gut” feeling and not a well-reasoned scientific feeling.

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