Canola has perhaps surprised market watchers with buying interest in the last two sessions, in advance of a Statistics Canada report that will most likely increase the production prospects for this crop. At the same time, canola's trends remain lower and perhaps a number of reasons exist why prices will find it difficult to reverse current trends.
Vegetable oil supplies in the world continue to weigh on the market. Attached is the continuous weekly chart for soybean oil, which indicates that prices this week have broken long-term support at 40.23 cents per pound, which reflects the 61.8% retracement of the move from 28.07, the low reached in the week of Dec. 1, 2008, to the high of 59.9 cents reached the week of April 4, 2011. This support level is found at 40.23 cents. While trade has bounced off of this week's low of 39.1 cents/lb, it remains below the 40.23 cent support level, which may lead to a further technical selling and a move lower.
The soybean market continues to reflect a bullish market structure as seen by its mostly downward-sloping forward curve (series of points which joins the futures closes for each consecutive trading month). For example, today's January future closed higher than the March, the March closed higher than the May, while the May closed higher than the July. This spells out a situation where commercial users such as crushers and exporters would rather see deliveries made sooner rather than later, as compared to a bearish market where they'd prefer to pay producers a premium or "carry" to store stocks for a future period.
At the same time, it's important to note that soybean meal remains the primary driver of this demand. The lower study reflects the continuous price spread between soybean oil and soybean meal, in U.S. dollars/ton. This spread reached its last high of $838.20/ton in April 2011 and has trended lower to today's close of $372.40/ton. This downward trend reflects the declining value of soybean oil in relation to the value of soybean meal in the crush. The most recent low for this spread was reached the week of September 9 at $348.20/ton, which may act as potential support in upcoming trade.
The weakness of oil relative to meal is also seen in the current weakness of canola relative to soybean price, which is not shown on the chart. The November canola/November soybean spread, valued in Canadian dollars per metric tonne, has drifted lower from a high of $102.63/mt in April, 2013 (canola priced higher relative to soybeans) while the most recent spread is at minus $5.31/mt, with canola priced lower than soybeans on a per tonne basis.
It could take a break in the bearish trends seen in the vegetable oil markets before any significant move higher in canola can be expected.
Cliff Jamieson can be reached at firstname.lastname@example.org
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