Canada Markets

While market watchers may have been disappointed with Monday's USDA report which left soybean ending stocks unchanged at 150 mb from the January report despite the average pre-report trade estimate from Dow Jones which suggested a tighter level of stocks, the soymeal trade continues to reflect an increasingly bullish situation.

Tuesday's trade in the March contract saw a new contract high reached of $451.10 before ending the day at $449.20/ton, up $5.20/ton. As seen on the attached continuous chart, this is a 21-week high for soymeal and is just 10 cents away from September 2013 high of $451.20/ton. The target for the continuous future is $466.70/ton, which represents the 61.8% retracement of the downtrend from the September 2012 high to the August 2013 low. Given the slope of the uptrend, shown by the blue line, this target may be reached by this June.

Both commercial and noncommercial traders remain bullish this market. The second study indicates the nearby March/May spread has recently broken resistance to close at an $18/ton inverse (March above the May), while the May/July is also inverted by $12.60/ton (May above the July), indicating the expectation of tight supplies as we move into the spring and summer months.

The last study indicates the actions of the noncommercial traders, or investors. Most recent CFTC data indicates that investors added to their not-long position for the fourth consecutive week to a net-long position of 49,890 contracts. Investors have held a net-long position since mid-February 2012, with the highest net-long position held being 107,252 contracts, while the average position over that period of time has been a net long of 55,933 contracts.

This move holds a number of implications for the Canadian agriculture industry. The livestock sector is not only hurt by the elevated futures prices but also the added impact of a weaker Canadian currency which also adds to the cost.

The higher meal price will have a spillover impact on competing meals such as canola. Tuesday's Canadian Canola Board Margin Index indicated the nearby crush margin at $206.97/mt, which is up from $183.15/mt a week ago and also above the $31.49/mt reported one year ago. Crush pace to date has been disappointing, with COPA's recent crush data suggesting year to date capacity utilization being 10% below year-ago levels.

One more point is the impact that higher soy meal prices will have on competing proteins. The most recent Feed Pea Benchmark Bi-Weekly report for the Jan. 14-18 period provides a snapshot in time which indicates potential value of peas in a ration given the current value of alternative feed ingredients. This particular report valued peas anywhere from $5.52/bu in Saskatchewan to $7.18/bu in Alberta given the cost of alternative feedstuffs. Given that these values are higher than the current market for peas, it does potentially provide a starting point for negotiation and lead to possible local outlets for prairie pulse production.

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

(ES)

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