Hope leapt into the canola market on Jan. 3, the first trading day of 2006, but soon the reality of oversupply knocked it down.
“Tuesday started with fund buying and short covering, but once that was over, some advisory services out there were recommending (farmers) sell cash canola,” said broker Jamie Wilton of Refco Canada in Winnipeg.
The commodity funds, which move in and out of markets to take advantage of or create sudden price movements, pulled back from U.S. soybean and Canadian canola markets after their Jan. 3 binge.
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“Without the funds in there to keep buying, there weren’t a lot of fundamental reasons to buy, so we drifted back down,” said Wilton.
Canola prices are low now, below what many analysts considered possible this crop year. At one time the idea of $250 per tonne canola futures seemed unreal.
Now, climbing back to that historically low level is a hope for many farmers.
Commodities broker Tony Tryhuk of RBC Investments said the brief New Year rally showed that canola prices can go above $250 in the right conditions, but going higher isn’t likely as long as farmers are sitting atop a mountain of canola stocks.
With many farmers in Alberta and parts of Saskatchewan getting big yields this year, prices that would have been ignored last year are now bringing sales.
“A street price in Alberta and Saskatchewan of $5.50 a bushel is a level that won’t historically attract a lot of farmer selling, but this time it really did,” said Tryhuk.
“At $252-$255 a tonne, if basis levels are tight, you can show the producer $5.50 a bu., and he’ll give it to you.
“Any rally above that should theoretically result in even more selling.”
That may create a cap for the canola market unless something fundamental changes, Tryhuk said.
“How is that market going to rally?”
The Canadian dollar hasn’t helped the situation. The day after the Jan. 3 rally the dollar soared to more than 87 cents US, although it later fell below 86 cents.
A number of analysts are expecting the dollar to continue heading toward 90 cents during 2006, based on expectations of continued booming exports of oil and gas. However, a minority is predicting lower energy prices and that the dollar will fall back toward 80 cents.
Every time the Canadian dollar rises in value compared to the U.S. dollar, world vegetable oil prices appear to weaken, because prices are set in U.S. dollar terms.
If today’s canola prices stayed the same in U.S. dollar terms, but the Canadian dollar was worth 65 cents rather than 86 cents, $5.50 per bu. would instead be $7.28 per bu.
The greatest hope for increased canola prices this winter is for major crop damage in South America. Right now, some areas of Argentina and Brazil are too dry, so continued dryness could significantly reduce production there.
Low soybean prices have also hurt many Brazilian farmers’ ability to pay for Asian rust spraying, even though the Brazilian government arranged modest financing to deal with the problem. The country’s banking system is primitive and farm input suppliers do not extend much credit to farmers.
While canola price news has been grim, Wilton said he doesn’t think new lows will be reached.
“I think we’ve turned the trend from overwhelmingly down to sideways for now,” he said.
