Canada Markets

New Crop Canola Futures Threatens to Test Recent Highs

By Cliff Jamieson , Canadian Grains Analyst
Today's gain of $13.90/mt for the November ICE Canada canola future brought today's high very close to a test of resistance at $571.40/mt, as seen on the daily chart, a level that was also tested last September. Momentum indicators (bottom study) continue to trend higher. (DTN Graphics by Nick Scalise)

Bullish signs are perhaps presenting themselves in the new-crop November canola future. The November future reached a recent high of $571.40/mt on Feb. 4, an area of resistance that had been previously tested on Sept. 6 and 7, but price action failed to generate a close above this level. After the Feb. 4 high, canola moved lower, while coming close to testing the 61.8% retracement of its December through February rally at $538.40/mt on Feb. 12 before its current leg higher.

Today's high, at $570/mt, came just shy of testing the $571.40/mt resistance level. Breaking through this level would indicate a continuation of its uptrend. Should this happen, the next test would be the July 20 high of $582.50/mt and next would be the contract high of $585.40/mt. Note that both daily momentum indicators (second study on attached chart) and weekly momentum indicators (not shown) are trending upwards with no sign of turning lower.

Other points to watch with regards to the market structure of new crop canola futures is the fact that the market remains inverted though the fall. On Feb. 1, the November 2013/January 2014 spread was at a $2.50/mt carry, meaning the January was trading $2.50/mt above the November price. This spread has since inverted, meaning that the November is now trading $3.00/mt higher than the January future, gaining an additional $.10 in today's session.

This strengthening of the new crop spread (not shown) is an indication of growing commercial bullishness in new crop positions. Note that this scenario is not presenting itself in soybean markets, as both the Nov/Jan and the Jan/Mar soybean spreads are trading at a carry, with each future trading higher than the one prior.

Another sign of industry bullishness is the narrow basis levels as seen in new-crop positions. Friday's prairie-wide average basis calculation, which is based on readily-available data, was $13.42/mt under the November future for October delivery. Single-digit basis levels were seen in Alberta which is extremely narrow for new crop at this time of year. Commercials are sending a signal that the squeeze in canola supplies does not end with the arrival of new crop. Market watchers will remain focused on seeded acreage projections and the trade-offs between canola and competing cropping choices. While Agriculture Canada's January data indicated a 1.3% drop in canola's seeded acres, Oil World Magazine has suggested this drop could be 10%.

Potential factors exist which could possibly weigh on the soybean market which may be detrimental to canola prices. The first is South American production. The market is quite nervous with respect to SA production potential, as seen in today's market move.

Secondly is the potential for the next United States crop. In his work titled Soybean Price Prospects-Near Term and Long Term, Darrell Good of the University of Illinois points towards the potential for similar acres to last year, while a return to trendline yield would ultimately lead to higher production and lower prices. In fact, he puts forward the pre-drought price of $11/bu., which would represent a $3.70/bu. drop from the nearby March close of $14.70 1/4/bu.

One wildcard he noted is soybean oil used in bio-diesel production. He sees uncertainty around this, because of the industry's "policy-driven" nature, although the continuation of the $1/gallon blending credit may lead to greater-than-anticipated usage of soybean oil through 2013, which makes up 75% of the feedstock for bio-diesel.

The bottom line is that there is no clear path for canola moving forward. Price action as trade takes place around areas of resistance will be important to watch, while weather will also play a gigantic role, in both South America and the U.S. Producers may want to consider getting their feet wet by capitalizing on the current narrow basis being offered and protecting price risk on a portion of expected production.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

(ES/)

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