A prominent market analyst warned canola producers earlier this month to watch for a disruption in what had been a steady price rally.
The next day, the market saw a reversal that lasted for several days.
Mike Jubinville, a market analyst and president of ProFarmer Canada, told growers at a Feb. 10 meeting in Rosetown, Sask., there is strong demand for oilseeds.
However, erratic price fluctuations could occur at any time and that could signal the rally is nearing its top, he warned.
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A similar situation evolved in 2008, he added.
Between Aug. 1, 2007, and Feb. 1, 2008, the value of November 2008 canola futures rose from $429 a tonne to $584.
There were periodic corrections but the trend was steadily upward.
But by late February 2008, markets were showing signs of extreme volatility. The price peaked at more than $760 but by April 1 had fallen to $550, victim of a pull out by speculators and the financial crisis that saw huge U.S. banks collapse.
Jubinville said similar volatility could evolve in canola in 2011.
“I’m looking for the same kinds of market volatility to evolve (this year) and when they do, I’ll take that as real sign that we do need to do something,” he said.
“When the market stops grinding higher and turns into one where you have aggressive, volatile activity punctuated by cash basis levels that widen out to absurd levels like we saw during (2008), that would signify to me that the cash trade is pulling away from the marketplace and now it’s being driven by a speculative component.”
In February 2008, canola basis was $30 to $35 under the nearby contract. This year it is closer to $15 under.
Jubinville said world vegetable oil demand has increased steadily for three decades and global stocks-to-use ratios are at their lowest point.
However, markets are also heavily influenced by speculative buyers who see commodities as a safe haven for investment money.
Prices could plunge if those investors abandon their speculative positions, leaving grain and oilseed producers to wonder what hit them.
“The market structure on how we trade commodities today is quite a bit different than it was a few years ago,” Jubinville said.
“The picture today is almost unimaginable relative to where we were 10 years ago in terms of the amount of speculative money that is in play in various commodities, including oilseeds.”
Investment funds have supported the grain market rally since last summer.
“But this kind of speculative influence has also created the potential for increased volatility in the marketplace and that’s just something that you as producers are going to have to get used to,” he said.
Oilseed analysts expect Canadian growers to plant a huge canola crop this year, possibly more than 20 million acres.
“Farmers can make money at these prices and that’s certainly adding to expectations that a lot of canola acres will be going in,” he said.
“But whether we can get all of this crop in the ground is going to be a big question mark.”
Much of Western Canada has extremely high soil moisture levels and acreage could fall well below predictions if there is a late, wet spring.
Demand should remain strong in the coming year. Jubinville estimated that Canada’s domestic canola crush could consume as much as six million tonnes of top quality canola.
A federal mandate to be implemented July 1 requiring a two percent biodiesel component in all Canadian diesel fuel stocks is expected to add further demand for Canadian oilseeds.
However, seeding intentions are hard to predict because margins for durum, spring wheat and malting barley are also appealing.
Jubinville said competition between corn and soybean for seeded acres is also heating up in the United States.
Last week, the U.S. Department of Agriculture issued a preliminary estimate for 2011 corn planting at 92 million acres, up 4.3 percent from 2010, and 2011 soybean plantings at 78 million acres, up slightly from last year’s 77.4 million. The first forecast based on farmer surveys comes out March 31.
Production news from South American soybean producing areas also warrants close attention, as does economic news from China and other key markets.
Jubinville said China has taken steps several times in recent months to cool the country’s red hot economy to try to control inflation.
However those efforts have been short lived.
China needs commodities, including North American oilseeds, and demand is likely to remain strong.
