Grain markets blow hot and cold after U.S. crop report

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The ICE Futures Canada canola market for the week ending Oct. 12 were narrowly mixed, with small losses in the most active front months, but a firmer tone in the May-forward positions.

Canola’s supply/demand fundamentals do remain supportive, which likely accounted for some of the strength in the more deferred months, but the commodity also remains a small player in the global oilseeds market and largely reacted to the whims of the U.S. soy complex during the week.

The U.S. Department of Agriculture released its much-anticipated monthly supply/demand report on Oct. 11, and the latest numbers did not fail to disappoint when it came to providing the futures markets something to trade off of — at least for one day. While the numbers could probably be described as neutral at best, the initial reaction was quite bullish. After being hit by fund long liquidation in the lead-up to the report, soybeans and corn both jumped sharply higher when the data came out. USDA upped its production estimates for this year’s soybean and corn crops from the September forecast, but demand was also forecast to rise — and supplies are still tighter than a year ago.

U.S. soybean ending stocks were forecast at 130 million bushels, and corn at 619 million bushels. Both numbers were below average trade guesses.

However, just as fast as prices jumped higher, they fell back down. Soybeans ended the week down 29 cents per bushel in the November contract, while December corn held on to a small gain of under five cents after being up as much as 25 cents on the week at one point.

From a chart perspective, after a brief break lower, the November canola contract has regained its footings above the psychological $600-per-tonne level and managed to settle above $605 every day of the week. While that support may be holding, there is also quite a wall to the upside and an argument could be made that canola is entering a bit of a consolidation area.

Canola basis

The harvest is done and canola yields were disappointing. This is now well known and factored into the futures. The smaller crop should keep basis levels looking attractive, as farmers will be reluctant sellers. However, as noted in last week’s report, the market will do its job to ration demand — which means exporters and domestic crushers will eventually back away once it starts costing too much to pry what’s left from the producers.

Over the first couple of months of the 2012-13 crop year the domestic crushers have been operating at a record pace, with 1.3 million tonnes of canola crushed to date, compared to 1.1 million at the same point in 2011, according to Canadian Oilseed Processors Association data. The export pace is also running strong, with the Canadian Grain Commission reporting total exports to date of about 3.2 million tonnes (up from three million at the same point a year ago). One, or both, of those demand streams will be curtailed in time. Domestic crushers are already looking at some of their weakest margins in years, while export customers are also starting to weigh their options — especially in light of ongoing global economic uncertainty.

The three U.S. wheat markets held on to small gains for the most part during the week, with a slight reduction in the world carry-out forecast for the grain somewhat supportive. Production issues in Australia and Europe were behind the tightening wheat scenario, but those problems elsewhere have still not done enough to increase the demand for U.S. stocks. U.S. wheat remains overpriced in the international market, which should limit the upside potential — at least, until Russia follows through with rumoured plans to halt exports, or something else happens in the wider market.

About the author

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Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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