Canada Markets

Spring Wheat Shines Spotlight on Growing Quality Concerns

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The December hard red spring contract closed higher on Tuesday for the sixth consecutive session, closing above the contract's 100-day moving average for the first time since June. The brown line on the second study points to the December/March spread closing at a ¾ cent spread, nearing a bullish inverse. The lower-study shows the continuous active HRS/HRW spread ending at $1.19 1/4/bu, the largest spread realized since April 2012. (DTN graphic by Nick Scalise)

Agriculture and Agri-Food Canada recently revised their supply and demand tables for Canada's principal field crops, taking into account Statistics Canada's July 31 ending stocks estimates as well as the more recent model-based production estimates.

One thing that jumps out is how current canola estimates for 2016/17 mirror estimates for 2015/16. Production is viewed to be close to identical to 2015, as are total available supplies. Total demand for the upcoming crop year is estimated to be within 500 metric tons of last year, with a slightly lower export forecast of 9.5 million metric tons partially offset by a higher domestic crush estimate of 8.9 mmt. Ending stocks are almost identical with the current crop year carryout estimated at 2.016 million metric tons. The 15-year average carryout for the years 2001/02 to 2015/16 is calculated at 1.7 mmt.

This report could point to 2016/17 as a carbon copy of the previous crop year. Taking into consideration that Statistics Canada's December production report containing the November estimates tends to be larger than previous estimates while even later revisions tend to increase the crop size even further, this may point to a potential bearish situation for the crop. Indeed, the upward-sloping forward curve, a line which connects the subsequent futures prices over consecutive futures months, does point to a bearish situation.

At the same time, the nearby November/January futures spread closed at $7.70/mt. This is viewed as a bearish spread given this spread is a significant percentage of full carry. Subsequent spreads, however, including the Jan/March, the March/May and the May/July, are much narrower. The two latter spreads narrowed in Monday's session, a sign of bullish commercial activity, with the May/July closing at minus $2.70/mt (July over the May) while nearing a test of resistance at minus $2.60/mt. Beyond the Nov/Jan spread, futures spreads can be viewed as neutral to bullish for the balance of the crop year, with the market suggesting things may not be as bearish as they seem.

Estimating demand has historically been a challenge for the USDA's soybean estimates and could also be a factor for the canola market. In the 2015/16 crop year, the earliest crush estimate was 7.2 mmt while the final estimate was 8.315 mmt. As well, the initial export estimate was 7.6 mmt, while the final estimate was 10.245 mmt. Currently, both crush and exports are currently behind the pace needed to reach the AAFC's recent estimates.

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