Canola futures prices have broken through the basement floor of their old trading range and appear to be heading toward a new bottom.
Farmers can be forgiven for wondering whether the word “range” can even be applied to this year’s canola prices because they seem to have one direction: downward.
“We’ve been setting lows for so long that there really is no guidance at this point,” said Nolita Clyde, canola market analyst with Ag Commodity Research.
Futures usually trade in a range within a trend. The upper limit of the range is called the resistance line and bottom limit is called the support line. If the price breaks higher or lower than these lines, it can signal a change in the trend.
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Canola has recently had a support level of $254.90 per tonne, but has now dropped below $250 and Clyde said the next support it might flirt with is $241.90, which was the bottom of the market in 2000, the last year prices fell this low.
Eventually, market analysts say, prices should “stabilize” and a new sideways trading range should be established for the fading 2004-05 crop year.
Analysts say calculating trading ranges is a complicated technical matter, but using someone else’s published or reported range is easy: the idea is to sell when prices are near the upper end of the range and don’t sell near the bottom.
Marketing adviser Brenda Tjaden Lepp said farmers shouldn’t get hung up on selling at “round number” price points, such as $6 per bushel canola, because that is a number produced by emotion that isn’t directly tied to the real market range.
And even if that number is near the upper end of someone’s reported range, it makes sense to sell at slightly below that point. That’s because many farmers will have the same target and will all try to sell at the same point.
Futures traders know that many farmers have price triggers at $6 per bu., so as soon as the basis and futures price equals $6, traders assume farmers will flood the market and the price will quickly drop, said Tjaden Lepp.
“It’s better not to use a round number, because the chances are you’ll miss it by a nickel. What’s a nickel? If you want six buck canola, why not sell at $5.95?
“You’ve got a way better chance of getting some sales at that point.”
At the same time, grain elevators that have been offering good basis levels this winter will reverse course once farmers are getting $6 per bu. because they know they probably won’t have to bid any higher to attract grain delivery, Tjaden Lepp said.
The actions of traders and grain companies are likely to make attractive prices last only a short time.
While psychological factors account for farmers storing canola until its price reaches the target $6 per bu., the levels of support and resistance in most technical analysts’ trading ranges rely more on mathematics.
Nevertheless, beneath the calculations lie the simple truths of supply and demand.
This winter there is too much canola and other oilseeds in the world, so the steadily lower trend in prices is not a product of market emotion, but a recognition of real world factors.
“Looking forward, I don’t really see anything that’s likely to help prices,” said Clyde.
“There’s just too much canola out there.”
Clyde, who believes canola is close to its long term bottom for this year’s market, said some farmers are likely to suffer if they hang on through the winter looking for substantially higher prices. If a spring rally does not occur, many are likely to dump their canola because they need money and they’ll collect prices at the bottom of the market.
Tjaden Lepp said farmers need to get away from emotional price points, try to discover the new trading range of canola and then try to sell at the higher points of that range.
“If that’s the pattern, use it,” she said.
