Canada Markets
Tariff Reaction Clue: Have Managed Money Traders Abandoned Their Bearish Bias?
Just over a year ago, March 2024 canola was trying to close above resistance at $640/mt. On Monday, the March 2025 canola contract closed at $640.50/mt. Don't get me wrong: It was a very stressful 365 days in between as bearish fundamental estimates emboldened managed money traders to set record large net short positions in anticipation of a further break in price. The short covering that's taken place during the past two months suggests they are finally abandoning their bearish bias and buying into the fundamentally bullish narrative.
Over the years, their (money managers) behavior seems to have changed. For decades, the normal pattern when they would shift positions would be three days of overwhelming orders with large price moves often the result. They wanted to complete a strategy adjustment quickly before others could front run them.
For the past year or so, a pattern has developed that is completely different. They now seem to be much more careful and patient when entering or exiting a position, trying to avoid significant price moves. Then once a base position has been established, they become much more aggressive with their orders with more significant price moves the result -- benefitting their base position along the way. Greatly expanded position limits enabled such a strategy shift.
An excellent example was witnessed in the corn market in the fall of 2024. Managed money trader selling had contributed to price pressure throughout the summer as the USDA predicted a record corn crop, peaking with a record net short position of 353,983 contracts (1.77 billion bushels) set on July 8. They appeared to lose confidence in the size of the crop and spent the next six weeks covering short positions before the corn market finally followed suit and reversed higher during the week ending Aug. 26.
Many in the industry that followed the data closely mocked the fact that corn could only rally roughly $0.30/bushel by the time the entire money manager short position was covered as of Nov. 4. During the next six weeks, the price only increased another $0.15/bushel, but by that time they were net long 159,415 contracts or almost 800 million bushels. The price has gained over $0.50/bu since they began adding to their net long position much more aggressively.
That may be the pattern we are currently seeing unfold in canola. During the past five months, the nearby canola price has fluctuated between $565/mt and $665 with very strong fundamentals being offset by pressure from potential trade wars. The latter has kept the price low enough to continue encouraging demand at a time when it should have been discouraged. (See more at https://www.dtnpf.com/…)
That period allowed managed money traders to get out of their record net short position without moving the market. They went from being 151,893 contracts net short (3.04 mmt) on Aug. 19 to only 34,870 contracts net short (700,000 mt) as of Jan. 28. If corn did in fact reveal a pattern, they are working towards building a net long position in time for a breakout.
The most recent clue supporting the theory was the lack of a sharp price break on the imposition of 25% tariffs on canola and its products. Months ago, when China announced its anti-dumping investigation, canola had a $45/mt range in one day. On Monday, with much more serious and immediate consequences, the March contract was only down $14.10/mt on the low and eventually closed $2.40/mt higher. This is a clear indication that money managers are using breaks to quietly cover their short positions instead of aggressively adding to them.
Going forward, we will likely need to see the tariff threats resolved more permanently and money managers get to a net long position to see a significant breakout from overhead at $640/mt. If we do, resistance at $665, $681 and $724/mt will likely be on the radar for the bulls.
Looking further at the demand fundamentals, the unsustainable pace of use has continued thanks to weak prices. According to the Canadian Grain Commission's weekly grain statistics report for week 25, exports have already hit 5.337 mmt compared to 2.723 mmt at the same point last year and current annual projections of 7.5 mmt. That was thanks to another stellar week with 206,900 metric tons exported, up from 202,500 mt the week before and well over double the 80,000 mt average needed for the remaining 27 weeks. Domestic disappearance was not to be outdone with 5.715 mmt consumed in the first 25 weeks compared to 5.159 mmt last year.
To that end, on a combined basis, total disappearance is currently 3.170 mmt above last year at 25 weeks into the current crop year. The recent Agriculture and Agri-Food Canada (AAFC) ending stocks estimate of 1.250 mmt is based on a combined annual increase of only 1.284 mmt. This is concerning.
For a quick technical update -- the monthly chart still has 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. On the weekly chart, bottoming formations look to be holding and a test of resistance at the 100-week moving average at $670/mt looks likely. The daily chart is trying to push higher throughout the volatile news, with resistance at $640 being surpassed as this is being published.
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Mitch Miller can be reached at mitchmiller.dtn@gmail.com
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