Canola rallying but might hit resistance to going higher

Oilseed values globally, including canola, are rolling higher as demand rises and production forecasts shrink.

Recent data showing disappointing canola yields in Canada are helping to lift the value of that crop, but it has lots of additional momentum from rising values for soybeans and soy oil.

From the start of August to Sept. 18, November canola rallied about eight percent.

But that is modest compared to the rally in soybean and soy oil futures of about 16 to 17 percent.

Nearby corn futures rallied 16 percent and spring wheat futures also finally sparked to life, rising five percent, with most of the gain in the last few days.

The more modest rally in canola might be partly due to the one cent rise in the Canadian dollar over the same period

The nearby November canola contract at about $530 per tonne on Sept. 18 reached the $530-$540 level that was the peak of the last rally in the spring of 2018 and so there could be technical resistance to going higher. Soybeans are in a similar situation with resistance around US$10.50 per bushel.

However, it might be possible for canola to catch up to the gains of soybeans and soy oil if harvest results prove that earlier optimistic yield forecasts were wrong. The heat and dry weather of August clearly took a toll.

Also Canadian canola exports in the first five weeks of the crop year are off to an excellent start, reflecting continuing strong offshore demand we saw in the second half of the last crop year.

In the five weeks to Sept.6. canola exports stood at 1.5 million tonnes, up 20 percent over the same period last crop year.

Grain exporters look like they have a strong program in the immediate future for all crops.

The recent Quorum grain monitoring report said there were 36 vessels lined up at Vancouver, an increase of four from last year at the same time and Prince Rupert’s line up was six vessels, up from three last year.

As The Western Producer has reported in recent weeks, the European Union had another bad rapeseed harvest, similar to last year’s crop and down 18.7 percent from the five-year average.

Consultancy Oil World estimates the European Union will import 6.3 million tonnes of rapeseed in the 2020-21 crop year, up from six million last year and 4.3 million the year before.

Ukraine also had a bad rapeseed crop. Oil World expects Ukraine will be able to export 2.1 million tonnes to the EU.

It expects the EU will import two million to 2.1 million tonnes from Canada, an amount similar to 2019-20.

That was a record high for Canada’s canola trade to Europe and was a key factor in filling in the hole left after China halted imports from Canadian grain companies Viterra and Richardson.

Looking ahead to 2021-22 prospects, Oil World expects EU winter canola plantings this fall will rise a little.

But extremely dry soils in Ukraine have farmers there questioning whether is it worthwhile to continue planting because the seeds might not germinate.

Australia’s canola growers expect a return to good weather this year will help them harvest in a few weeks a crop that the government currently estimates at 3.4 million tonnes, up from 2.33 million last year.

Turning to competing oilseeds, the United States Department of Agriculture trimmed its forecast for domestic soybean production to 117.4 million tonnes, down from 120.42 last month but up from last year’s crop of 96.7 million.

Even with the third largest soybean crop in its history, the USDA expects year-end stocks will fall to 12.5 million tonnes, down from 15.64 million last year.

But the real news in the U.S. soybean market is China’s recent demand.

As of Sept. 18 China had bought American soybeans on 11 consecutive business days.

For the 2020-21 crop marketing year, the U.S. has soybean export sales on the books for 30.1 million tonnes to all destinations, known and unknown. That is about three times the quantity on the books at the same time last year when the China-U.S. trade war was at its height. Two years ago sales were 16.29 million.

Sales identified as going to China this year are 15.87 million tonnes, up from 1.25 million at the same point last year.

This has soy futures traders in an exceptionally bullish mood.

Dry weather in parts of South America, linked to a forming La Nina, also supports this mood.

Brazilian farmers are about to begin soy seeding and southern regions are severely dry. La Nina can lead to dry weather in the south but tend to have little impact in the rest of the country.

Northern and western Argentina are also suffering extreme La Nina dryness and there also have been damaging frosts. That is limiting production prospects for its wheat crop that will soon be harvested and will leave dry soil for the soybean crop that will be sown later this year.

Turning to palm oil, hopes were high in January that previous months of dry weather would reduce production and lift palm prices in the first half of 2020, however COVID disruptions hammered demand and prices lower.

Palm oil values are now recovered from the COVID-related low in May but are still far from setting highs.

The main price support is linked to the shortage of labour at Malaysia’s plantations, which can’t get imported workers from Indonesia and Bangladesh because of COVID travel restrictions.

Production in the second half of the year is expected to recover. Exports are expected to lag because of the pandemic and weak crude oil prices are keeping a lid on palm-based biodiesel.

But this lacklustre market in palm is not casting clouds on the oilseed market.

In the coming weeks, price direction will depend on whether China continues binge buying U.S. soybeans and whether South America remains dry.

Soybean futures are in overbought territory, increasing the risk for a correction, but on the other hand it is still dry in the U.S. Midwest and the USDA might be forced to shave its soybean yield forecast down a little in the October report.

Also, the strong pace of soybean sales so far might cause the USDA to lift its full year export forecast.

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