Canada Markets

The November canola price has drifted lower over the past six consecutive sessions, after reaching a recent intra-day high of $544.90 per metric tonne Aug. 26. With a potential bin-busting crop just around the corner, canola prices owe a great deal of recent support to the volatile soybean market, where an ongoing effort is trying to determine the crop's potential and establish whether production will once again need to be rationed in the 2013/14 crop year.

As seen on the recent chart, the canola price has retraced to the 38.2% Fibonacci support line, which reflects 38.2% of the upward move from $472.40 to the $544.90/mt high, which is at $517.20/mt. Today's close was at $517/mt, just below support, so tomorrow's trade will shed light on whether this level will hold. Prices also tested the support of the 50-day moving average in today's trade, trading below the $116.40/mt support before retracing to close above this level. Should these support levels give way in upcoming trade, prices may move to the 50% retracement level of $508.70/mt, which is also in the vicinity of the 20-day moving average, currently at $509/mt.

The second study is the daily stochastic momentum indicators, which are on a downward course and show no sign of a move higher.

The third and lower study represents the spread between November canola and November soybeans, as measured in Canadian dollars per metric tonne. A high was reached for this spread April 11 of $102.86/mt (canola at a premium to soybeans), while late last week moved to a negative spread and closed at minus $5.84/mt in today's trade (soybeans valued $5.84/mt higher than canola).

Perhaps the rationale for this change in fortunes can be explained by a look at the forward curve for both soybean oil futures, as well as soymeal futures. The forward curve is simply a line that connects each consecutive futures price on a chart and explains the relationship between prices on the y-axis over time, on the x-axis.

Soymeal futures have a downward sloping forward curve (not shown), which slopes down from the top left corner of the chart to the lower right corner of the chart. This is described as a bullish chart, as each consecutive futures month is trading higher (inverted) than the one after it, an indication that buyers want product sooner than later and are willing to pay more for it. DTN refers to this chart as the market's view of the fundamental situation, which in this case, is bullish.

Soybean oil, on the other hand, is quite a different story. The forward curve is sloping upwards (not shown), which indicates that each consecutive trading contract has a price that is below the one that follows, which is also known as a carry market. This sends the signal that buyers are not as anxious to obtain supplies, and are willing to pay a premium or "carry" for delivery in the futures. This is viewed as a bearish forward curve or a market indicating bearish fundamentals.

Because of canola's high oil content, its price signals are unfortunately tied to the fortunes in the soybean oil market and may partially miss out on price strength attributed to the meal side of the complex.

Further tests of support should be watched in upcoming days, while producers may consider the use of protective puts for protection from further price deterioration.

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

(ES)

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