Wet Midwest soybean fields support canola drought rally

Canola futures burst through the $500 per tonne barrier June 19 and added another two percent June 22 as this column was written.

The rain over the weekend in Western Canada was spotty again and in amounts that generally were not enough to dispel the spectre of drought in large parts of Alberta and Saskatchewan.

Canola is well supported with old crop stocks expected to be tight and new crop production estimates falling with each dry day.

Forecasts through to the end of June show little hope for widespread heavy rain in the western Prairies. A lot of reseeded canola could be flowering in the hottest days of July.

Even without this weather challenge, the forecast for 2015-16 canola ending stocks was tight, and it will likely be tighter now that analysts are expecting the crop to be at least a million tonnes less than expected and likely even smaller than that.

However, canola prices are not rallying independently.

Soybeans are also rising on wet weather in the U.S. Midwest, which is downgrading crop conditions and making it perhaps impossible to seed the final soybean acres.

Some prairie farmers chafe under the notion that their region’s crops are too small to independently drive futures markets higher.

It sometimes seems that traders pay more attention to a shower hitting Chicago than a disaster brewing over a large part of the Canadian Prairies.

However, it can’t be denied that American crops are much larger than Canadian production. A 10 percent drop in American soybean production would short world oilseed supply by 10.4 million tonnes. The same drop in canola production would short the oilseed supply by only 1.5 million tonnes.

The crops are not wholly interchangeable, and the market does pay attention to canola-specific supply and demand dynamics. In addition to Canada’s problems, canola crops in the European Union, Ukraine and Australia are also expected to be down from last year.

However, it would be hard for canola to take flight if soybean futures were plunging.

There had been worries that could happen, with record soybean acreage in the United States, greenhouse-like weather in the Midwest and talk of seeding another record crop in South American this fall.

But now with too much rain in the U.S. Midwest, it appears not all the acreage will be seeded. And demand for U.S. soybeans appears to have held up even as South America markets its recently harvested crop. Analysts think the U.S. Department of Agriculture will trim its domestic ending stocks forecast.

As Ed White’s story this week says, technical chart analysis indicates crop markets are getting primed for a rally this fall. The fundamental picture is taking its first steps to support the technical view. What will be the event that pushes the market into a full blown rally?

With that bullish analysis stated, there is one bearish factor. The canola crush margin fell further this past week, hurting crushers’ profitability.

That was reflected in the 12 percent decline in the weekly crush to 130,383 tonnes, only 65 percent of industry capacity.


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