Canada Markets

Despite the bullish fundamentals for the soybean crop, a wave of negativity has swept over the market earlier this week. The threat of a record South American crop continues to hang over the market, with the notion that this record acreage will produce a record crop and that logistics will allow for this crop to reach the global marketplace in a timely fashion.

The Chinese have driven stakes into the heart of this market by cancelling soybean purchases made from the U.S. Yesterday, announcements were made regarding the cancellation of 540,000 mt of soybeans to China. This follows an announcement of a cancellation of 300,000 mt to the Chinese and 120,000 mt to unknown destinations earlier in the week.

Soybean futures have reacted negatively to this news, as one would expect. Futures fell more than 65 1/4 cents during the course of this week. As of Wednesday, soybeans breached the 50% retracement level of its long-term rally, which is at $14.54/bu.; this is a trend which began on Dec. 14, 2011 and ended at a high of $17.81 1/2 on Sept 4. Thursday's trade saw futures fall further to come close to testing the psychological $14/bu. level and also the support of an upward-sloping trendline which also began at the Dec. 14, 2011 low.

Canola has also retraced from its earlier uptrend, but not to the extent that soybeans have. Dec. 20 trade saw canola futures come close to testing the 50% retracement of an uptrend which took place during the November 2011 through September 2012 period. The 50% retracement in question is at $570.60/mt, which also happens to be the November low. As of the end of this week, this level has continued to hold.

Canola's premium to soybeans continues to gain in strength. As of late July, the spread posted a low of $14.20/mt under soybeans, while this spread closed at a $59.05 premium to soybeans and its trend appears to be higher. For comparison, over the three years from 2009 to 2011, canola reached a maximum premium of $104.37/mt over soybeans in May 2011, while hitting a low of a $71.32 discount to soybeans in June 2009, while the three-year average has canola at a $39.32/mt over soybeans.

Canola's strength can also be put into perspective when one considers the crude palm oil situation in Malaysia. Palm oil stocks in Malaysia, the second largest palm oil producer, reached yet another record inventory level in November, with a level of 2.56 million tonnes. This is due to a combination of high production levels and weak exports. Where crude palm oil has historically maintained a $100 to $200/mt discount to soyoil, it is currently at a $324.34/mt discount, with inventories expected to remain high during the first quarter of 2013 which will maintain pressure on this spread.

Canola's disappearance is continuing to take place at an alarming rate, given the fact that our reduced crop requires stocks to be rationed. As of week 20, total disappearance (exports and domestic crush) is running 5.4% ahead of last year, while 19.1% ahead of the three-year average. Also as of week 20, the total canola disappearance of 5.966 mmt plus visible stocks of 1.100 mmt represent 49.9% of the total estimated supplies of 14.2 mmt, with 61.5% of the crop year left to go. With 1 mmt being the level of visible stocks that has historically been considered comfortable or safe, projections for this year's 350,000 mt carryout send a clear signal of how tight overall stocks will get.

Also of interest are recent announcements of Chinese import data. China's imports of Canadian canola, from January through November of this year, are up 157.58% over the same period last year. Meanwhile, canola oil exports are also up 93.87% this year, as compared to the first 11 months in 2011. There is certainly a growth story taking place here.

A producer comment made this morning suggests that there are many chapters left in this story and that certainly is the perspective that I am taking.

Cliff Jamieson can be reached at Cliff.Jamieson@telventdtn.com

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