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ICE Futures Canada canola contracts finally broke out of their long-time flat trading range during the week ended May 14, but rather than seeing the upward jump that many farmers had been holding out for, canola turned weaker and set fresh contract lows along the way.
While oversold price sentiments allowed for some short-covering at the lows, the charts have definitely turned bearish for canola, at least in the short term. July canola hit an intra-day low of $371.60 per tonne during the week, setting the stage for a technical move into the $360s, according to some chart followers. However, canola has yet to retest that low, and the longer the market holds above it, the better the argument that the futures are once again basing themselves in a sideways range.
Relatively favourable weather conditions across Western Canada were also cited as one of the reasons for the weakness in canola, as moisture conditions were improving in many areas and forecasts calling for warmer temperatures should allow seeding progress to pick up in earnest.
Provincial crop reports and data from the Canola Council of Canada have had a common theme in recent weeks: it’s been too cold and too wet to get this year’s canola crop in the ground. If Environment Canada’s forecasts are to be believed, those crop reports will see some dramatic changes in the upcoming weeks, as conditions turn warmer and drier across the Prairies.
The favourable crop prospects don’t necessarily bode well for canola prices. However, if the demand is there, a large crop will be needed to meet that demand, especially with the new domestic crush capacity coming on line. There were some signs of increasing demand during the week, as the downturn in the market helped encourage some fresh export pricing from Pakistan and Mexico. Traders were also starting to talk about China possibly relaxing some of its import restrictions on blackleg in Canadian canola.
Barley futures were once again untraded and unchanged during the week, as any activity in the commodity becomes more and more confined to the cash market.
In the U.S., the futures were also lower. Outside market forces, such as the European economic uncertainty and the resulting rise in the U.S. dollar, were behind much of the price action in U.S. agricultural commodities. Generally favourable crop conditions, both for the crops already in the ground and those still to be planted, also accounted for some of the selling pressure.
Corn was caught up in the broad-based commodity selling, but did manage to find some support of its own from confirmation that China was buying more U.S. corn. While some traders were still discounting the Chinese buying as not large enough to seriously alter the supply/demand outlook, the sales should be getting significant enough to cut into the already tightening U.S. corn stocks forecasts.
Apart from the global economic back-and-forth to which the commodities continue to react, the big news in the agricultural market during the week was the release of the U.S. Department of Agriculture’s latest supply/ demand tables. U.S. and global corn ending stocks were forecast to tighten, while soybeans and wheat were both expected to increase their carryout by the close of the 2010-11 crop year. Soybeans face a similar prospect as canola, with the larger supplies likely being met by some fairly solid demand. However, the same may not be able to be said for wheat.
Plenty of wheat
At the close of the 2009-10 crop year, USDA forecasts there will still be 950 million bushels of wheat around the world to carry over to 2010-11. With global wheat production forecast to come in at the third largest on record, ending stocks by the end of 2010-11 could very close to one billion bushels.
To work those numbers back to Canada, the most basic conclusion to draw is that further downward revisions to the Canadian Wheat Board’s pool return outlooks (PROs) are probably a safer bet than increases anytime soon. The recovery of the Canadian dollar back toward parity will also be a bearish factor in the price calculations.
One thing to watch on the wheat front may be how many acres are shifted out of durum and into spring wheat. If that shift ends up larger than early expectations, prices for the two commodities could also shift accordingly, although Canada will remain a follower of the global trends overall, which are bearish for both wheat and durum.
Phil Franz-Warkentin and Dwayne Klassen write for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.