Canada Markets

November Canola Takes a Wait-and-see Approach

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The November canola contract is locked in sideways trade above solid long-term support (not shown). Price has struggled to hold gains above $450 resistance for three consecutive days, while also failing to test the downward-sloping blue trendline. The third study shows trade volume falling over the past two sessions, while the lower study indicates an increasingly bearish response by commercial traders. (DTN graphic by Nick Scalise)

Over the past eight sessions. The November canola contract has traded sideways within a $15.60 per metric ton trading range, with no hints as to where the next leg will take us. For the past three sessions, daily highs have been reached above $450/mt, while resistance has forced a sub-$450 close each day. Prices also continue to respect the downward-sloping trendline (blue line), drawn from the $532/mt high reached June 15.

At the same time, price has remained above the $442.20/mt low reached July 25. Past work in this space also shows three monthly lows on the continuous active chart in 2015 which points to solid support in the $435.50/mt to $437.60/mt range, which may also act as support if tested.

For the near-term, prices may be finding middle-ground between the threat of large crops in North America combined with concerns of the potential damage from excessive rains in areas of the Prairies and concerns of whether there will be enough canola to meet demand in the upcoming crop year.

In DTN's Dow Jones ICE Canada Weekly Outlook on Wednesday, Ken Ball of PI Financial stated "even if we have a huge crop coming, there's not one rationale that I can think of for reducing the level of consumption on the coming year," and "while an 18 mmt crop would be large, demand could easily exceed 19 (mmt)."

The current AAFC estimate for demand is 18.303 mmt in 2015/16, or 1.13 mmt higher than the previous year. Over the past five years (2010/11 through 2014/15), total year-over-year demand is estimated higher in four of the five years, with the average year over year growth over the five years at 990,600 metric tons.

The incentive to crush remains. Thursday's Canadian Canola Board Margin Index, a proxy for returns generated crushing the seed, was reported at $117.10/mt, more than double the $55.73/mt reported for Aug. 4 2015.

While the lower-study on the attached chart shows the Nov/Jan spread weakening to minus $6.60/mt (January over the November) this session, this could be viewed as a neutral carry as it represents less than 67% of full carry and signals a cautious approach by commercials.

Another interesting feature in Thursday's market was the low trade volume. For the second day in a row, total volume declined, with today's total volume (not shown) reported at roughly 12,292 contracts, down 35% from Wednesday's volume and the lowest daily activity seen since July 4 when canola traded on its own while the U.S. market was closed for holidays.

Traders are on the sidelines and seeking direction. While futures may be slow to react given a change in the fundamental outlook, Wednesday's average prairie cash basis was calculated at $37.26/mt under the November, which compares to $20.31/mt under this time last year and bears watching.


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