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A price chart is worth a thousand words

What can we learn from a look back at this May 2017 canola futures chart?

I was looking at this May 2017 canola futures charts the other day to remind myself just how much we can learn from them. It is a lot easier to figure out the trends and patterns on a chart after they’ve happened than it is to decipher what will happen while it is happening.

Cyclical patterns

Cyclical patterns are just that, cyclical, because something is happening in a repeating pattern on a regular basis (such as seeding) that can have a significant influence on the markets.

In the fall of 2015 we had a big canola crop and we saw prices slowly crawl up to $500/t levels in December before drifting steadily lower until March.

The main reason futures fell from December through March was the large South American bean crop that was coming off and pressuring world oilseed crop prices lower. On March 1 we hit a bottom at $468/t.

As always, lower prices spurred buying activity. That, along with a low Canadian dollar, pushed canola sales to record levels, reducing overall stocks and pushing futures higher. Combine that with buyers wanting to incent producers to put in more acres for the coming year, and we saw canola futures rally $71/t. Prices peaked on June 15 at $539/t.

Not every year will be the same or move as high as the rally last spring. However, world demand for canola continues to grow. It was estimated that we needed to seed between 20 and 21M acres to meet demand. To seed that many acres, producers had to shorten their canola rotations in 2016. The best way to get them to do that was to push futures prices higher. The market pushed futures up to $539/t. The unfortunate reality is that less than 10 per cent of the crop was actually priced at that attractive level.

2016 prices

That is pretty much exactly what happened the spring of 2016. Spring seeding started early and big acres were seeded into almost perfect spring conditions across most of the Prairies. This set the tone for a bumper canola harvest. On June 15 the futures uptrend broke and then began a steady three-step regression trend lower that eventually bottomed on July 25 at $460/t (pretty much in line with the previous low in March at $468/t).

From July until mid-October we saw a sideways trend building that traded in a $30/t range between $460/t and $490/t. This trend was likely to continue for some time, as the crop was coming off with higher than expected yields. Only a significant event would break canola out of this sideways trend — either yields would have to continue to grow larger, which would have driven futures lower, breaking the $460/t support level, or a major weather event would have to push futures higher to break past the $490 resistance level. Well, we know what happened.

October was a difficult month for harvesting. When the snow hit we saw futures break through that trading range and rocket higher on concerns that over 25 per cent of the crop was still in the field and may not get combined. This drove futures up over $40/t in two weeks.

Then the weather changed and harvest resumed in pockets across the Prairies, pushing futures lower on the anticipation that more canola would get combined. This weather didn’t last long; rain and snow returned to stop the harvest again. Futures did an about face and headed $35/t higher to top out at $545/t November 28. Futures struggled to hold at that level and eventually headed lower from outside pressures that included large U.S. and South American bean harvests. We saw futures fall through December to a low of $502/t on January 9.

That low again inspired new buying, and an even lower Canadian dollar was plenty of incentive for buyers to get aggressive with purchases. This helped push futures values up as canola inventories are now being depleted quickly because of the unharvested acres and lost production still out in the fields.

This year

Since mid-January canola futures have been trading in a sideways pattern in a $35/t range between $505 and $540/t. The main reason for the highs is the tight canola stocks. The main reason for the lows is the South American harvest that’s hitting the world markets. It continues to grow in size weekly as the harvest progresses.

Until some event, negative or positive, happens to push futures out of this sideways range they will continue to trade between these levels.

That brings us to today, where we see that futures trading near the $505 support level of the sideways trend, mainly due to the fact that the South American crop continues to get even larger, putting more competitive pressure on canola futures. A higher Canadian dollar is also negative for canola futures.

What would breaking that $505 support level mean? It would likely mean we’ll see canola futures head lower in the short term, until new buying emerges to support price levels and push them higher. How low might futures go? Based on technical analysis review they’re expected to head down to a level of $485/t, unless something else happens.

Now spring seeding is on everyone’s mind. How many acres of canola will need to be seeded? Will the marketplace push futures higher to buy acres?

We are at a much higher futures value now compared to last March, so I can’t see any reason the marketplace would try to push futures higher, especially when you compare canola’s profitability against other crops. The economic incentive for producers to grow more canola is already there. For that reason, plus the pressure from the large South American crop, I can’t see futures going higher, sorry.

About the author

Columnist

Brian Wittal

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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