Canola has come through a difficult month although technical signals look positive. The May contract shows a rally from the December low of $565.20/mt to its February high of $638.10/mt on February 22. Since then, prices have retreated to a low of $603.40/mt although have since made a sharp move higher. The 50% retracement of the December through February uptrend is $601.60/mt, which has acted as support as prices approached this level on three occasions in February.
Canola has fought a struggle this month between the forces of canola's bullish fundamental picture and the bearish factors surrounding the record South American soybean crop, which is on the verge of hitting the world market. Monthly trade remained range-bound between the low of $602.40/mt and high of $638.10/mt.
One interesting slide presented at the Grainworld conference in Winnipeg focused on the dangers of relying on canola fundamentals as a means of determining price direction for the crop. Dave Reimann, a market analyst with Cargill, presented a chart similar to the one attached while focusing on canola's price movement in years of tighter stocks/use ratios on the prairies.
P[L1] D[0x0] M[300x250] OOP[F] ADUNIT T
As seen on the attached chart, the first sharp drop in the stocks/use ratio (black line) took place in the 2003/04 crop year, when the ratio fell to 8.3 stocks/use from 18 the previous year. For clarification, this ratio is calculated by dividing the ending stocks for the crop year by the total disappearance for the year, which includes both export volumes and the volumes crushed domestically.
So what happened in this particular crop year? The open for canola on Aug. 1 on the continuous daily chart, the first day of the 2003/04 crop year, was $345/mt. Canola prices reached a crop year high on April 5, 2004 at $444/mt, while the close on July 31 in that crop year was $324.70/mt, despite the tight 609,000 mt carryout that crop year. The tighter stocks/use ratio was accompanied by sliding prices.
Another dip in the stocks/use ratio can be seen on the chart in the 2008/09 crop year, when stocks/use fell to 13.2%. After reaching a high of $754.30/mt on Mar. 3, 2008, the previous crop year, canola opened the 2008/09 crop year at $603/mt on August 1, while closing the crop year on July 31 at a price of $417/mt. Once again, tightening supply did not lead to heightened price activity.
Despite forecasts for an extremely tight 2.5% stocks/use ratio this crop year, based on an Agriculture Canada forecast for a 350,000 metric tonne carryout on July 31, canola opened the crop year on August 1 at $631.70/mt, while today's close is just slightly lower at $625/mt. Activity over the balance of the crop year will determine if canola's tight fundamental situation will further drive price, with canola's five-year seasonal index chart indicating strength from late March until canola's seasonal high in June.
Overall direction of the soybean market plays a greater role in determining price direction for canola than relying solely on canola fundamentals. A quick look at the correlation for May canola versus May soybeans on ProphetX resulted in an 88% correlation, pointing towards the need for close watch on soybean market developments as an indicator of what canola will do next.
Cliff Jamieson can be reached at email@example.com
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