ICE outlook: Large crop bearish long-term

ICE Futures Canada canola futures moved to the downside during the week ended Dec. 4, hitting fresh contract lows in the process — but the market managed to come off its lows and close above key support after breaking below it on Wednesday.

Some of the weakness in the market was linked to concerns about Canada’s commercial handling system not being able to move the large canola crop this year.

A report from Statistics Canada, which showed a surprisingly large 2013-14 Canadian canola crop of 17.96 million tonnes was also bearish for prices. In 2012-13, 13.87 million tonnes of canola were grown in Canada.

But canola managed to stay off contract lows and above key support due to spillover support from the advances seen in the Chicago soy complex during the week.

The sharp downswing in the value of the Canadian dollar, which lost more than half a cent against the U.S. dollar during the week, was also supportive. The weaker Canadian currency makes canola more attractive to crushers and exporters.

The surprisingly large Canadian canola crop does point to weaker canola prices going forward. But they won’t drop significantly unless the Chicago soybean market weakens as well because canola is already undervalued compared to soybeans, said Ken Ball of PI Financial in Winnipeg.

He added it looks like there could be some weakness coming soon in the U.S. markets, which would be bearish for canola prices.

“We’re starting to hear very strong rumours that two Chinese crushers are offering U.S. cargoes of beans back for sale on the market and that’s the fear that traders have had,” said Ball. “If the Chinese buying suddenly flip-flops, things could get a little messy here.”

If the January canola contract settles below the key support level of C$480 per tonne, he added, it could continue down to the C$450 per tonne area if the U.S. markets weaken as well.

With the large Canadian crop and logistical issues, carryout stocks are also expected to be even larger than anticipated, which may lead to weaker prices in 2014, Ball said.

“With a (canola) crop number like that (17.96 million tonnes) plugged into supply and demand tables, you’ve got a carryout nudging three million tonnes,” he said.

“And that actually starts to significantly affect the outlook for next year’s canola price because you’ve got November 2014 (contract) trading at a husky premium and a three million-tonne carryout means you’ve got a lot of room for a weather problem next year and still have large supplies.”

– Terryn Shiells writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.