On a regular basis, profits are taken in the canola market with market commentary suggesting that canola prices are too high in relation to soybean oil, creating additional selling and capping canola's upside potential. Today's market action may be a concern to the canola trade given this logic.
Today's market saw a 27 3/4-cent gain in July soybeans due to a lower U.S. dollar, tight old-crop supplies and spillover buying from the corn pit, with the July future closing at $14.08 3/4 per bushel. At the same time, July soybean oil closed on the defensive, down .03 cents/pound to end the session at 49.51 cents/lb. Further weakness in the vegetable oil complex was seen in Malaysian palm oil today, closing 2.2% lower. Canola did, however, post gains, closing $6.70 per metric tonne higher in the July future at $623.20/mt.
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The attached chart plots continuous weekly canola prices (black bars) as charted against continuous weekly soybean prices (blue bars, both in Canadian dollars per metric tonne. The bottom study is the spread between the two, in Canadian dollars/metric tonne. The canola/soybean spread has been in a solid uptrend since July 2012, as shown by the upward-sloping blue trend line off of the 2012 low of minus $14.20/mt, or in other words, the canola price trading below the soybean price by an amount of $14.20/mt.
While this trend remains in place, a recent rally off of the March 2013 low of $64.33, after testing trend line support, failed to post a fresh high, falling short of the February 2013 high of $102.61/mt after reaching a high of $101.20 in early April.
Watch for a further test of trend line support at roughly $83.50/mt, given further weakness in this spread. Failure to hold this trend may indicate further weakness is in store for the canola market, relative to soybeans.
Cliff Jamieson can be reached at firstname.lastname@example.org
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