Trade war sends canola sideways

Canola futures have been stuck in a sideways trading pattern for months, and analysts aren’t sure how long it will last

Up, down, sideways. Repeat.

That has been the pattern of agricultural commodity markets for decades.

It is why Mike Jubinville was feeling optimistic about grain and oilseed markets heading into 2018.

Markets had gone through the up, down and sideways cycle.

“Historically, prices respond with a move to the upside after a long period of sideways trading,” the MarketsFarm analyst told farmers attending the 2019 Farm Forum Event in Saskatoon last week.

“That didn’t happen on this occasion.”

The cycle was broken in the summer of 2018 when U.S. President Donald Trump initiated a trade war with China.

That has resulted in a prolonged sideways trading pattern that has lasted for about five years depending on the commodity.

It is a new, unfamiliar dynamic that has market analysts scratching their heads. Nobody knows how long the sideways pattern is going to last.

Jubinville said canola futures are stuck in that sideways trading pattern.

Before Trump’s America-first crusade, canola was trading in a range of about $475 to $500 per tonne. After the trade war, it dropped down to the $440 to $475 per tonne range.

“That is our reality at this point in time,” he said.

Prices have also been pummeled by Canada’s political spat with China, which resulted in sharply reduced trade to the former top market for Canadian canola.

“If we had fluid trade with China and never had this issue, canola would be a good $1 per bushel higher than it is today,” said Jubinville.

Another bearish factor is the size of Canada’s crop. He estimated one to two million tonnes of canola are left in fields.

The trade still thinks that will eventually be market-ready canola. That will result in ending stocks of 3.5 to 4.5 million tonnes, which means the trade won’t be chasing growers for their crop.

Canadian crushers are processing as much of the crop as they can but there is a finite capacity. Jubinville thinks they will crush 9.8 million tonnes in 2019-20.

The one bullish factor that could lift prices is the shrinking stocks-to-use ratio on global vegetable oil supplies, which is at the lowest level since the late-1970s.

Palm oil prices are at a two-year high. Soy oil prices bottomed out in late 2018 and have been on the rise.

Canola oil is trading at a $25 to $30 per tonne premium to soybean oil, which is about half of the normal spread.

“In my opinion, right now canola is on sale,” said Jubinville.

He thinks canola is underperforming other oilseeds and could be due for a correction that may push cash prices into the $10 to $10.50 range, which is likely the top of the market these days.

Jubinville was asked to share his thoughts on the flax market.

He said prices have been stable for an extended period, with No. 1 flax trading in the $13 to $13.50 per bu. range.

Sales have been strong and he doesn’t anticipate a big carryout, so there is little downside for the crop.

But the upside is limited by the anticipation of more competition in the Chinese market from Black Sea wheat because China has new phytosanitary agreements in place with Ukraine and Russia.

“Does that mean the market needs to go lower? I would say not necessarily at this time but I think we’re in kind of a stabilization point where the price is not going to change that much this winter,” he said.

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