DTN Analyst Todd Hultman posted an excellent piece on Wednesday titled When Prices Go Vertical, describing the potential risks involved in the high-flying spring wheat futures and the challenges involved in picking market tops.
Despite the current drought and prospects for hot weather to hit the spring wheat growing areas in the northern United States and Canadian Prairies, Hultman suggests the spring wheat market may have strikes against it -- global stocks remain high while traditional relationships between spring wheat and soft red winter wheat may be out of whack. In addition, both daily and weekly stochastic momentum indicators are in overbought territory, leaving the market vulnerable to a technical sell-off and change in market direction.
The sharp $36.70/mt move in the November canola in just six sessions could perhaps be viewed differently. First is the link to the much larger soybean market. The latest CFTC data shows investors holding a massive net-short position of 94,540 soybean contracts, the largest net-short seen since 1997, at a time when weather is not very cooperative and crop conditions in the U.S. are seen deteriorating. DTN analysis points to the soybean condition index at 154 points as of July 2, down 4 points from last week and compares to the 167 points calculated this week last year. This week's rating was the lowest rating in four years.
Another noticeable difference is that today's November canola trade saw a fresh daily volume high, with ProphetX showing 25,356 contracts trading on Wednesday. While spring wheat is reaching new highs, daily volume on both the September and December spring wheat contracts has waned over the past three sessions from the June 29 contract high.
One last point is seen in actions of commercial traders, indicated by the blue line on the third study. Today's trade saw the Nov/Jan spread narrow $.70/mt, to minus $4.80/mt. This spread has been mostly flat or unchanged since May 19, while strengthening $1.20/mt since June 29. While this level of carry could suggest a neutral view of market fundamentals, commercial traders have clearly put aside prospects, given a record canola acreage and have shifted focus to weather conditions that could trim yield potential.
This week's trade began with a bullish gap higher on Sunday night with Monday's low of $500.30/mt higher than last week's high of $499.50/mt. The May high of $509.50/mt was breached in Wednesday's trade, while today's high of $515/mt challenged the December high reached on the November contract. This is a level showing significant resistance, with moves into this range shown in late November/early December and again in early March. A breach of this level would point to the possibility of a test of the contract high reached in June 2016 of $520/mt.
One final supportive factor for canola prices is the stochastic momentum indicators. While the second study shows the indicators on the daily chart slowly moving into overbought territory (above 80%), both the weekly and monthly charts show these indicators trending higher but still in neutral territory, which could support a further move higher.
DTN 360 Poll
This week's poll asks which data reported in the Statistics Canada acreage report you are concerned with and question the most? You can weigh in with your thoughts on this week's poll, which is found, at the lower-right of the DTN Canada Home Page.
Cliff Jamieson can be reached at firstname.lastname@example.org
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