ICE Futures Canada canola contracts moved lower during the week ending Wednesday, dropping sharply for two consecutive sessions before uncovering some support to the downside.
While further technical declines are possible in the short-term, the fundamentals remain supportive overall, according to an analyst.
If actual Canadian canola production in 2012 finished near the relatively tight 13.3 million tonnes predicted by Statistics Canada in early October, "there shouldn’t be much room to the downside in canola," said Wayne Palmer, senior market analyst with Agri-Trend Marketing in Winnipeg.
Any problems with the South American soybean crop would boost demand for U.S. soybeans, which would pull canola up as well, he said.
Domestic crushers are showing very good demand, he added, and might need to go long the futures eventually if they are unable to pull enough supplies out of producers’ hands.
Strength in the wheat market will also mean canola prices will need to stay high enough to buy acres going forward.
However, while he expected to see a rally at some point before spring planting, Palmer also cautioned that the canola futures market is very volatile at present following a decline in open interest over the past several months.
Uncertainty in the outside financial markets could trigger a fund selloff in the futures, he said.
Also, Canadian canola is overpriced by $20 to $30 per tonne compared to Australian seed, Palmer noted. As a result, many traditional buyers of Canadian canola in the export market are turning to Australia.
The high Canadian prices have the potential to lead to more demand rationing, which could leave some farmers looking for a top in the market stuck with canola in their bins without a place to sell it to, another trader added.
— Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.