The red-hot oilseed market appears to have cooled off for now.
The May, July and November contracts on the Winnipeg ICE Futures Canada exchange finished down the limit $30 per tonne on four consecutive days last week. The May contract lost 17 percent of its value, dropping from a contract high of $769.90 a tonne March 3 to close the week at $639 a tonne – or from $17.50 a bushel to $14.50.
A Winnipeg broker, who spoke March 6 after the third limit down day, described the canola crash with blunt language.
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“It’s carnage right now,” said Jack Peters, a broker with Union Securities.
Canola was caught in a wave of selling that hammered all food oil. Palm oil futures lost 7.8 percent for the week and soy oil futures, closely linked to the price of canola, plummeted 11 percent on the Chicago Board of Trade. Soy oil sank from a high of 72 US cents a lb., finishing the week at 64 cents.
The absence of significant change in vegetable oil fundamentals led most market watchers to conclude that the speculation bubble had burst.
“We’ve got a market that was very, very overbought,” said Peters, noting that when the market is rapidly rising, no one wants to sell. But at some point the momentum shifts and everyone wants out.
“When they start heading for the exits, everybody runs for the exits,” to cash out their profits, he said.
Now that the selloff has begun, the question becomes how long before buyers jump back into the market?
That depends on when crushers and other buyers believe the correction is complete, Peters said.
“They’re not going to jump in here and say, ‘Oh, we’re going to just stop this,'” Peters said. “They’re business people too … they’re not going to buy until it looks like bottom.”
A few buyers decided to jump in March 10, demonstrating that they were willing to buy after the May canola contract opened the day down $30, hitting $609 a tonne for the May contract, but then bouncing back to close at $639.90.
Despite the recent losses, analysts still have faith in canola and all oilseeds. Most market observers believe the fundamentals and technical indicators are still solid.
“I’d like to believe that this is only a correction,” said David Drozd, market analyst and president of Ag-Chieve, an ag marketing company in Winnipeg.
Once the overbought conditions are alleviated, he expects canola to regain its swagger.
“We’ll still continue toward our target of $799 for canola, and $79.70 for soy oil,” he said.
Drozd, a technical analyst, said the historical trend supports his predictions of another canola rally. Typically the oilseed trades stronger in the spring and he expects the market to follow that trend.
“I don’t see this market topping out at this time of the season,” he said.
To illustrate his theory, Drozd said the previous historic high for canola, of $724 a tonne, was set in June 1984. Adjusted for inflation, that equates to $1,490 a tonne in today’s prices.
And in 1994, a strong year for prices, the market again hit its peak for the year in June, rising past $520.
“We have a really strong seasonal tendency for grain markets to rally (in the spring). They turn up from March, into the May-June period,”
Drozd said.
