Canada Markets

Statistics Canada's Canola Estimate is Puzzling

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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January canola consolidated within Wednesday's trading range on Thursday, while so far this week has fallen only $.20/metric ton. Thursday's close was barely below the $506/mt retracement support, while the lower study points to both the Jan/March and May/July futures spreads strengthening, a sign of supportive commercial buying interest. The first study shows the stochastic momentum indicators in oversold territory, which may slow speculative selling. (DTN graphic by Nick Scalise)

Record yields were achieved in some areas of the eastern Prairies, while in areas of the central and western Prairies, some acres were parched with a lack of moisture and hot weather that will certainly lead to debate over Wednesday's Statistics Canada canola production estimate based on November producer surveys. This report pegs 2017 production at a record 22.313 million metric tons, up 8.7% or 1.7 mmt from the estimate of 2016 production and is higher than the highest pre-report estimate reported by media.

Given a 1.3 mmt carry-in, crop-year supplies would now be in the vicinity of 23.6 mmt, with current demand estimates pegged at 20 mmt based on AAFC's 11 mmt export projection and 9 mmt crush projection. Latest data points to cumulative disappearance slightly behind the steady pace needed to reach this target. The latest Statistics Canada estimate may suggest that a big whopping increase in ending stocks are in store, the first year-over-year increase in stocks seen in four years.

The curious part is that the market action is not reflecting the bearishness of the data presented. Canola closed down a modest $1.70/metric ton following the report, after trading as much as $5.60/mt lower earlier in the session. The session's close was in the upper-half of the range traded on Wednesday, with added support from a 60-basis-point drop in the Canadian dollar against the United States dollar. Thursday's trade saw a further drop of $2.10/mt, while so far this week, the January canola contract is down $.20/mt, or a nickel per metric ton per day, far from a bearish response.

Basis is also seen strengthening this week. The average spot prairie basis has strengthened $2.97/mt in the past two days to an average $18.11/mt under the January, based on accessible internet bids, while some prairie crushers and exporters are showing single-digit basis levels as early as January/February. While seed is seen pouring into the handling system at a record pace, commercial stocks are holding near the 1.5 mmt mark, while buyers' interest has not slowed. There is also reports of grain companies jumping on producer-target offerings late in the crop year, as if supplies will be tight.

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A look at the spread chart on the lower study of the attached chart shows that while the Jan/March spread remains at a bearish minus $8.40/mt (dark blue line, March trading over the January), it has narrowed or strengthened in each of the past three sessions. The May/July spread also strengthened $.40/mt this session to a spread of $3.30/mt (light blue line, July trading over the May). This is a sign of a less-bearish response on the part of commercial traders.

Perhaps big export movement is around the corner? One way of looking at this is to compare the current pace of movement to the historical pace. Over the past five years, an average 33% of total crop year exports have been shipped through licensed channels as of week 18. Given the week 18 data released today, cumulative crop year exports of 3.5995 mmt could be extrapolated based on the five-year average pace to a hypothetical crop year export of 10.8 mmt, shy of last year's total exports as well as current crop year projections.

The next Statistics Canada report will be the Dec. 31 stocks report, which will be released on Feb. 5. This report could garner added attention given the possibility of some form of reconciliation, given concerns with current estimates. Until then, we can only continue to follow market signals as they appear.

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DTN 360 Poll

This week's poll asks your thoughts on the latest Canadian Federation of Independent Business November Business Barometer Index for agriculture that shows a slight improvement in the Ag confidence index but remains close to the lowest index indicated for the 13 business sectors monitored. You can weigh in with your thoughts on this poll, found at the lower right side of the DTN Canada Home Page. Thanks for your input.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

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