Canola contracts traded on the ICE Futures Canada platform are definitely much stronger exiting 2010 then they were going into the year. Anyone making a ‘Top 10’ list of the reasons for that strength would likely cite the adverse weather conditions across the Canadian Prairies first and foremost, but strong demand, activity in outside markets and bullish technicals also played a part in the eventual gains.
Technical analysis can be a tricky science at best, at least when it comes to predicting where the commodity markets may be headed. For every signal pointing higher, there is often another technical measurement pointing to a looming correction lower, and the exceptions that prove the rule can sometimes just lead to a new rulebook. However, the charts can be an excellent tool, and one thing they do very well is tell you where the markets were.
The best description of the weekly canola chart over the past year would be to say it looks like a hockey stick. The market was flat, flat, flat for the first five months of 2010, generally holding within a $20 range between $370 and $390 per tonne in the front months. Then, at the beginning of June, values took a sharp turn higher and have not looked back (aside from a few profit-taking corrections) since.
Short supply, strong demand
What happened at the beginning of June resulted in a nice chart to dissect, but had everything to do with the fundamentals in Western Canada. In looking over some of the commentary coming from analysts early in the spring, the expectations were for a ‘sea of yellow’ across Western Canada with any rainfall being met with the reply that ‘rain makes grain.’
As we know now, the rain just didn’t let up and turned a sizeable portion of normally landlocked Saskatchewan into lakefront property. A long harvest window in October helped rescue the crop in many cases across the Prairies, but the damage was done and the fact that there is less canola to deal with this year continues to keep values well supported. On the demand side, the world wants vegetable oil and the export pace is holding fairly steady on the year. Domestic crusher demand should hit a new record, as a number of new processors came online in 2010.
In the U.S., soybeans, corn and wheat are all much stronger at the end of 2010 then they were to start the year. The chart pattern in soybeans was similar to the one seen in canola, although the U.S. market actually lagged its Canadian counterpart to the upside, starting its upward trend about a month later.
Corn and wheat both held steady for the first half of the year, jumped sharply higher over the summer and are now both back at new range-bound plateaus heading into 2011. However, the weekly price swings have become much wider.
For the first half of 2010 all the talk in wheat was of burdensome global supplies and the fact that North American prices were too high to bring in any export demand. The wet weather in Canada was an early warning sign for producers here that supplies may not be as tight as anticipated, but it was a drought in Russia that really spurred wheat higher. Russia and other former Soviet Union countries are now short of grain and have shut down their exports.
New supplies from Australia were supposed to help alleviate some of the tightness, but they had their own problems with excessive moisture. The U.S. is now about the only major player left with exportable supplies of high-quality wheat, which should help keep values in North America well supported. However, dry conditions across the U.S. Plains are leading to some concerns about the U.S. winter wheat crop, and if there is poor emergence in the spring some of that wheat could end up plowed under in favour of corn or soybeans.
Fight for acres
Those two crops were caught up in their normal fight for acres heading into the spring of 2010, with wet weather also causing delays in some cases. In addition to the spillover from the rally in wheat, the general gains seen in soybeans and corn over the year were also tied to their own tightening supply situations, as export demand remains strong enough to take care of the large U.S. production. The attention in soybeans and corn is now turning to South America, and production prospects from there.
Overall, 2010 was a volatile year in the grain and oilseed markets, due in large part to the weather that hit new records for wetness in some parts of the world and for dryness in others. Producers may be better off in terms of prices, but that’s only if they have something to sell. The spread between high-quality and feed-quality commodities is already widening in Western Canada, given the higher percentage of the crops that graded as feed. Only time will tell what 2011 will bring, but it’s safe to say that 2010 was not like any years that came before and a repeat is hopefully highly unlikely.