Threats to U.S. soybean crop elevate canola futures

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Canola futures on the ICE Futures Canada trading platform continued to benefit greatly from the extremely hot and dry weather conditions in the key growing regions of the U.S. soybean belt during the week ended July 6.

The threat of reduced soybean yields in the U.S. definitely maintained the weather-based rally that has pushed ICE canola values to new contract highs.

Support in canola also came from steady domestic processor demand as well as speculation that China has either purchased additional quantities of the Canadian commodity or were making serious enquiries.

Some weather issues on the Canadian Prairies also were said to have provided support, but the jury on this is still up for debate. There is no doubt that some regions of the key canola-growing areas in Western Canada are experiencing excessive moisture due to recent storm activity. There are also a number of producers calling for precipitation soon in order to prevent yield loss due to dry soil conditions. There were also concerns about hail damage, but to tell you the truth, I can’t ever remember canola production being significantly reduced because of this event. In fact, most industry participants are of the belief that canola is developing well across the Prairies.

There was some actual trade in milling wheat contracts during the week, with most of the action occurring between commercials. Values were bolstered by the upward price action seen in the U.S. markets, particularly Minneapolis wheat futures.

ICE Canada also raised durum and barley bids, but there was little to no volume. Market participants linked the jump in price to ICE Canada trying to keep values in line with the action in Minneapolis.

The lack of precipitation combined with extremely hot temperatures in the U.S. was the main factor that took Chicago (CBOT) corn and soybean futures up. Soybean values touched new four-year highs during the period ended July 6 while corn managed to hit new 10-month highs.

Corn in the U.S. is in a critical stage of development, and the absence of precipitation during this heat wave was seen causing a major reduction in yield potential. There were reports out of the U.S. that some corn fields in the driest areas were barely waist high.

New estimates

Private analytical firm Informa Economics backed these fears up in new estimates made during the week.

Informa estimated corn yields at 153.5 bushels per acre, based on harvested acreage of 88.9 million acres. Informa’s corn yield was 1.4 bushels below its previous forecast, but almost 10 bushels below Informa’s early-season yield forecast. Informa’s current corn yield forecast is 12.5 bushels below the 166 assumed by the U.S. Department of Agriculture in its June supply and demand report.

U.S. farmers were expected to harvest 13.641 billion bushels of corn in 2012, the firm said. Last year, U.S. corn output measured 12.358 billion bushels,

The firm reduced its yield projections in nearly 20 states, with Kansas experiencing the largest drop.

Meanwhile, Informa pegged U.S. soybean yields at 42 bushels an acre, which would be down 0.7 bushels from the firm’s previous forecast and would be 0.5 bushels above last year.

Informa tempered its yield forecast for several states due to this season’s below‑average start.

The estimates from Informa be compared with the USDA numbers scheduled for release after press time last week, on July 11. Preliminary yield projections from the private sector for the upcoming USDA report for corn ranged from 147.1 bushels per acre to 160.2 bushels.

Pre-USDA-report soybean yields from industry participants ranged from 41.3 to 43.9 bushels per acre. This compares with the June USDA forecast of 43.9 bushels and the year-ago yield of 41.5 bushels.

Wheat futures on the CBOT, MGEX and KCBT also rallied significantly during the week. Much of the upward price action was also related to the weather issues that influenced the price gains in corn and soybeans. Some of the strength, however, also continued to be tied to the poor growing conditions for the wheat crops in the Black Sea region, China and Australia.

The weather-based rally in the U.S. will remain a key focus of the markets in Chicago and Winnipeg in the near term, but it is important to remember that this type of price movement is normally short-lived.

“There certainly can be a further push higher in both CBOT soybean and ICE canola, but once the weather situation eases, the push down will be quick and hard,” an industry participant warned.

“Demand destruction” is another phrase being used to temper the bullish enthusiasm in the oilseed sector. What this means is that when values climb too high, end-users balk at having to pay those kind of prices and back away from the market. In this kind of situation they turn to their built-up reserves to cover immediate needs or even seek out cheaper alternatives.

Another consideration that needs to be kept in mind and not forgotten is that the world’s macroeconomic issues continue to remain a factor that could surface at any given time and derail the weather rally.

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