Long time to get back to exactly where the rally started

So here’s a crappy chart to look at and feel morose about today:

That’s January canola futures and January soybean futures. (Canola’s green)

Prices are back to precisely where they started. It’s as if the U.S. Midwest drought never happened. As if the Canadian canola crop wasn’t beset by blackleg, aster yellows and generally poor yields.

The crop ended up a bunch worse than expected in early June, yet it’s at the exact same price point. Quite amazing to see.

That suggests a few things, a couple of which I’ll yammer about. One is that demand is a lot weaker than anybody believed a few months ago. A few months ago everyone I interviewed about canola oil and other vegoil demand was that it was inelastic and buyers would push prices to wherever they had to in order to get product. That may be true about human consumption vegoils, but there’s so much cheap palm oil out in the world today that buyers can just switch over to that and away from expensive Canadian canola or super-pricey U.S. soybeans. Weak world vegoil prices are what kept canola from rallying like soybeans during the drought panic. Soybeans are mostly a meal and feed crop, so the widespread shortage of all feeds in the Midwest led to the rally. Canola is overwhelmingly an oil crop so it didn’t follow much of the rally.

Now it seems sales of canola are coming to domestic crushers and the export market has dried up. The stuff going out through Vancouver is old business getting done, not new sales, from what I hear. Overseas buyers have found cheaper vegoil crops elsewhere, are waiting for Australian canola, or are somehow doing with less or without.

Another thing that could be happening here, as I’ve written about before, is the typical seasonal pattern of the crop markets, which weaken through the harvest period. Farmers flood the elevator system with new crop off the combine, so commercial prices weaken, weakening the futures market in turn. Yields almost always tend to turn out better than USDA and other countries’ agencies first predict, so supply tends to go up over the course of the autumn. And there’s less and less chance of any weather hurting a crop that’s going into the bin.

My own personal wacko theory, which I actually believe, is that the autumn is just plain depressing, as it gets colder, greyer and darker, so everyone gets glum and the air just whistles out of the markets until bright white snow brings light back to the world.

Regardless, seasonality could have a lot to do with this. Seems to fit the pattern. (Darin Newsom of DTN recently wrote an excellent piece of the apparent falling-apart of the seasonalities in the grain markets. I found it here:http://www.traderplanet.com/articles/view/162265-commodities-why-don-t-seasonals-work-anymore/)

But probably not the extent of the slump in soybeans and canola. That’s what’s worrisome here for canola producers. Many other crops are still holding onto some gain from the Midwest drought rally. Canola’s totally given up its. Most analysts were bullish about canola going into spring, as they were with soybeans, on the assumption of low stocks and super-high demand. (Canola stocks were more comfortable, but its year-on-year demand increases were also more impressive.)

That unexpected weakening of demand is disconcerting for oilseed bulls, and that’s probably the most notable aspect of canola’s return to pre-Midwest drought prices. It was an assumption we all thought we could bank upon. Turns out it might not be.

About the author

Ed White — Ed White has specialized in markets coverage since 2001 and has achieved the Derivatives Market Specialist (DMS) designation with the Canadian Securities Institute.

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