Canada Markets
Analysis of Canadian Canola Market Contains Intriguing Clues
I was going to use my first unscheduled blog to introduce myself and provide some insight into what makes me tick. Upon reflection, that's a waste of your valuable time with most of the information in my bio anyway. It's far more fitting to demonstrate my analysis style with a look at likely the most-important market to the average Western Canadian producer -- canola.
I'm not a purist regarding analysis. I look for clues from the fundamentals, the technical, and the market participants themselves through the Commitments of Traders report. I let the clues suggest a theory of price direction with the more clues supporting the theory, the more confidence in the conclusion. So, in no particular order, let's have a look at canola.
Future changes to both supply and demand assumptions appear to lean bullish. On the supply side, there is a general consensus that final production estimates will fall from the Sept. 16 Statistics Canada model-based prediction of 18.98 million metric ton (mmt); it's just a matter of how far that is up for debate. Looking at provincial estimates and considering reports of disappointing yields due to drought and disease, 18 mmt may be difficult to achieve.
The demand side is even more intriguing with strong exports, driven initially by Chinese purchases, competing with record crush thanks to increased capacity developed to help feed the renewable fuel expansion. That's where this blog entry's headline comes from. With 2.589 mmt exported in just the first 10 weeks of the marketing year compared to 1.087 by that time last year, end users may be getting uncomfortable. The current projection is for exports to total 7.5 mmt, up from 6.683 mmt last year. Leaving only 4.911 mmt for the last 42 weeks, weekly exports only need to average 117,000 metric ton (mt) to reach the estimate. Thursday's figure for week 10 was 253,000 mt following 384,800 mt in week 9. More intriguing than most shows currently on TV! Not to be outdone, cumulative domestic crush to the end of week 10 was 2.464 mmt versus 2.207 last year.
Before I carry on, I would like to make a quick comment on China and their interest in Canadian canola. The Chinese anti-dumping investigation into canola may actually inspire increased business as they stock the shelves ahead of any potential trade disruption. Given the previously detailed export demand, much of it assumed to be Chinese, and the price rally since the investigation was announced -- that theory seems valid.
Looking at the market participants themselves, through the CFTC's Disaggregated Commitments of Traders report, money-managed funds are still net short over 86,000 contracts or 1.72 mmt as of Tuesday, Oct. 15. That suggests they could be a good source of buying interest in the futures markets should the outlook for canola continue to improve. Taking a step back, this is a perfect example of why it's important to monitor this group. They tend to focus on momentum as much as anything, with the result often being prices moving further than they should regardless of whether the move is up or down. As a prime example, they hit a near record net-short position of 151,893 contracts or 3.038 mmt on Aug. 20 when November canola futures closed at $565.10 mt. Buying themselves out of almost half of those shorts would have contributed to the rally that left the current price of November canola at $635. With the fundamentals and technicals improving, further short-covering should be supportive.
From a technical perspective, I like to look at various timeframes to see where we may be in the big picture. The monthly chart (each bar represents the high/low/close of the month) left a very interesting divergence bottom formation with the rejection of new lows in September. In that case, the price put in a new reaction low but the Relative Strength Index (RSI) did not. The RSI is simply a mathematical formula looking at the relationship between the high, low and close to highlight market internal strength or weakness. Especially on long-term charts, a divergence bottom (or top if that was the case) is worth respecting. The weekly chart has the same divergence bottom topped off with a key reversal from a new reaction low (during the week beginning Sept. 16). The next goal in this case is to close above the weekly 100-week moving average. The daily chart has turned decidedly bullish as measured by a number of different indicators. The January futures have easily cleared the 100-day moving average, suggesting pullbacks may be viewed as buying opportunities for those that want or need to.
Bringing it all together, the analysis does not suggest prices will go up long term, but it does provide enough clues to suggest being patient and developing a disciplined marketing plan that rewards rallies with incremental sales would be justified.
With that keep in mind I'm always happy to get feedback along with any suggestions for future blogs. And remember, take time to do something you enjoy today.
Mitch Miller can be reached at mitchmiller.dtn@gmail.com
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