Crude Drags Down Oilseeds

WRITTEN FEBRUARY 14, 2009

During this past week (February 9 to 13), I received a number of responses from Alberta growers to the question whether cash canola bids of $10 per bushel have recently appeared in your local area.

I was somewhat surprised. Earlier in the week, various companies were indeed offering cash bids of $10 at a number of locations for nearby delivery. Obviously some very good basis opportunities were required. Most of the $10 bids seemed rather concentrated in southern Alberta — Calgary and south — though there were a few responses at that price level way up in the Peace District. In the central part of the province, prices might not have gotten to that level, but perhaps have come close.

Winnipeg canola futures slipped in the week this report was written, with the nearby March contract back in the $420-$430 per tonne range. Erosion in Chicago soybean futures provided an obvious negative influence. Reports of increased rain for South American soybean crops, souring global economic worries which stymie buying interest (especially spec buying), and an ugly turn lower in energy markets have all worked against the ag sector lately.

March soybeans penetrated and closed below support recent lows.

Futures need to return above the US$10 per bushel level to generate fresh technical buying interest. Important near-term support lies at the early February low of $9.34 1/2. (See chart of CBOT March soybean futures accompanying this report.)

ENERGY A DRAG

The breakdown in crude oil in recent days is rather concerning. March futures declined to US$34 per barrel. Oil prices continue to erode with more evidence that U. S. storage facilities are bulging with unused crude. Oil closed under $40 for the first time in several weeks on Monday (February 9), and has closed lower every day since.

A weekly report from the U. S. Energy Information Administration showed that crude inventories jumped by 4.7 million barrels for the week ended February 6. That easily surpassed trade expectations.

Including last week’s build up, U. S. crude inventories have increased by more than 30 million barrels in the past five weeks.

Weak product demand is forcing these refiners to curtail activities and cut runs. That backs crude up into terminals, pipelines and floating storage.

A dismal forecast by the International Energy Agency on Wednesday further highlighted falling demand. The Paris-based agency lowered its estimate for global oil demand in 2009 by 570,000 barrels to 84.7 million barrels per

day because of the worsening economic downturn. The lowered forecast came after the International Monetary Fund predicted the world economy to grow by only 0.5 per cent. Not only will the two-year contraction in oil demand be the first since the early 1980s, but 2009’s decline will also be the largest since 1982, the IEA said.

OILSEEDS VS OIL

I mention crude oil developments as it remains very much linked to a longer term thesis presented in this space many times before. In a nutshell, grain and oilseed markets have little to no chance of sustained price recovery as long as the energy markets remain under pressure. The ag sector is joined rather directly to the energy sector as noted in Chart 2.

While soybean futures recently diverged somewhat from crude oil, a substantial decline in crude is likely to provide headwinds for beans…and oilseed markets generally. While I don’t think we are heading back to the lows in beans, we could easily re-test the lower end of the trading range and chart support in beans identified above.

CANOLA PRICES STUCK

The canola futures market has been rangebound since harvest, with the exception of the early December plunge. Until we see fundamental circumstances change, I suspect we’ll stay in this kind of oscillating market for a while. If South American crop conditions further deteriorate into disaster or early seeding/growing conditions turn threatening into spring for North America, perhaps that could be a catalyst to drive prices higher.

But again, canola will not lead the way higher in any sustained fashion at this time. Canola can, and likely will trade higher periodically, but it must be led higher by competing oilseeds such as soybeans.

Canadian canola is not in short supply. In fact there has never been more unpriced canola still in the hands of the farmer. And that source of overhead supply will provide a continual drag on the market when prices hit targets that entice farmers to sell. And for the past number of months, that target has been in the area of $9.50 to $10 per bushel (depending on one’s location) or equal to overhead futures resistance in the $450 per tonne region on nearby positions.

For the time being, we have to assume that rallies are not sustainable in the immediate outlook. Therefore look to tests of the upper end of trading ranges as selling opportunities.

Mike Jubinville runs Pro Farmer Canada from Winnipeg and can be reached by e-mail at [email protected],or through his web site at www.pfcanada.com.

Pro Farmer Canada is for informational purposes only. The publisher and its agent or employees shall not be liable for any loss or damage suffered by any person as a result of reliance on any of the contents contained within these products; whether such loss or damage arises from negligence or mispresentation or any act or omission of the publisher or its agents or employees.

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