Canola futures broke through resistance June 1, lifted by weekend frost in Manitoba that appears to have damaged canola enough to force reseeding.
The next resistance point will be at about $500 a tonne, where it peaked last spring before the steep decline through summer to harvest.
Can it climb that high? Hard to say, but if it stays dry there is a good chance.
In addition to the support from the frost damage, canola also sailed on a favourable wind from soy oil, which rallied May 29 and June 1 on news about biodiesel demand.
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The U.S. Environmental Protection Agency on May 29 unveiled much delayed biofuel targets.
The EPA took a middle ground approach to the targets, pleasing neither the ethanol nor oil industries. However, the biodiesel numbers, which directly affect soy oil demand, were more warmly received.
The proposed goals for biodiesel would grow to 1.9 billion U.S. gallons by 2017 from 1.63 billion gallons in 2014.
The proposal is an improvement over the EPA’s original proposal in 2013 to keep the biodiesel standard flat at 1.28 billion gallons through 2015.
It is not clear how long this reaction to government policy will continue to support soy oil, however, more sustained price support for canola should come from that fact that it’s looking like Canadian yields might be down this year.
Frosts struck most newly seeded crops in the second half of May. The initial reports we had about frosts on the western side of the Prairies were that damage was not that bad. Talk from Manitoba as of June 1 is of more severe damage.
But suffice to say conditions have been much less than ideal and some fields required reseeding. That means they could flower at the end of June when it is hotter, reducing yield potential. They are also at greater risk if there is an early fall frost.
There also seemed to be more talk of flea beetle damage.
And then there is the biggest worry, the lack of rain.
A huge part of the central and northern grain belt in Alberta and Saskatchewan has had almost no rain this spring.
There was spotty rainfall the night of May 31 and forecasts called for rain in Manitoba and Alberta south of the TransCanada Highway on June 2, but the moisture was expected to miss southern Saskatchewan and all central and northern grain belt areas.
The forecast for the rest of the week was dry.
Drew Lerner, president of World Weather Inc. who more often than not seems to get the long range forecasts correct, says the El Nino that has formed in the Pacific and other factors are expected to cause a dry summer over much of the Prairies.
Agriculture Canada is already forecasting very tight 2015-16 carryout stocks — only 500,000 tonnes — and that is with a yield forecast similar to last year.
And with Cargill’s new crush plant at Camrose, Alta., and Bunge’s Fort Saskatchewan, Alta., expansion coming on stream, domestic demand will rise.
Bottom line: As yield potential falls, it would seem that prices will have to rise to ration demand.
But on the other hand, offshore buyers might seek substitutes if canola prices get too far ahead of soybeans.
And there seems little likelihood of soybeans rallying.
South America is still selling its bumper soybean crop and American farmer are moving into the homestretch of seeding a record area to soy.
Weather in the U.S. Midwest is mostly good.
So soybeans could be the anchor preventing canola’s efforts to take flight.
