ICE Futures Canada canola contracts remained pointed decidedly higher during the week ended Feb. 17, showing no real signs of slowing down.
Similar gains in the Chicago soy complex did provide some underlying support to the Canadian futures, but canola was also benefiting from its own bullish fundamental and technical factors.
Depending on the chart analysis you want to focus on, canola is either entering overbought territory and is thus due for a correction, or it’s in the middle of a solid rally with no end in sight for the time being. How the charts play out remains to be seen, but the fundamentals for the time being definitely look constructive.
Canada has exported 5.15 million tonnes of canola during the crop year to date, which compares with 3.95 million at the same point the previous year. That’s a record pace, and could very easily contribute to drawing stocks down below the magic one-million-tonne level by the time the 2012 production starts to become available. The domestic crush is also very active, with 3.6 million tonnes processed to date, or 600,000 more than at the same point in 2011.
Concerns over European and Ukrainian rapeseed crops, due to adverse winter weather conditions, also look supportive for canola prices in Canada.
The solid demand and resulting tight stocks situation mean the industry would like to see an increase in production in 2012 to keep the demand satisfied. After planting 18.9 million acres of canola in 2011, industry sentiment is leaning toward a 21-million-acre crop in 2012 in order to replenish stocks. If the dry weather conditions, and talk of possible drought, persist into the spring, there may be a need to secure even more canola acres in order to counter the possible decline in yields.
In the current market environment, old-crop canola contracts are trading at a sizable premium over the new-crop futures. Spring really isn’t that far away, and under the current environment it looks like an increase in the deferred months is more likely than declines in the nearbys. Milling wheat, durum and barley futures saw some light activity during the week, but liquidity is still slow in building for the new contracts.
In the U.S., wheat, corn, and soybeans all moved higher during the week, with the largest gains in soybeans.
The strength in soybeans, at least in theory, was partially tied to the fact that a Chinese government delegation was in the U.S. during the week signing off on some contracts. Those purchases would have happened regardless, but the headlines were enough to trigger some additional speculative buying in the futures.
Renewed concerns over South American soybean production, as conditions turned hot and dry in Brazil, were also underpinning the U.S. soy market, given ideas that any problems in South America translate into increased demand for U.S. supplies.
For wheat, persistent weather problems in Ukraine and Eastern Europe were getting talked up during the week. Just as with the soybean situation in South America, production concerns in one part of the world will open the door for the grain to flow from somewhere else. The demand for grain isn’t really going anywhere, which means any lost exports from Ukraine will need to be filled from somewhere else — and the U.S. could easily fit the bill.
Attention in the U.S. is also starting to turn to new-crop planting ideas, and to the fight for acres between soybeans and corn. We may still be in the middle of our lacklustre Canadian winter, but spring is just around the corner, if not already here in the southern U.S.
It’s getting to be more than a little old, but economic news out of Greece continued to sway the financial markets — and, in turn, the commodity markets — during the week. Volatility can be expected to remain the order of the day in the global financial sector for the foreseeable future.