The canola market is demonstrating all the signs of a short squeeze, says an analyst.
“I don’t know who’s short, but by the looks of it someone is short March canola and they need to buy it to get out of their position,” said Brian Voth, president of IntelliFARM Inc.
Whoever is short is going to keep bidding up prices until they can find a willing seller.
The March futures contract closed at close to $718 per tonne today.
Prices have been rallying all week after taking a breather last week, dipping down as low as $650 per tonne.
“We were far overdue for a correction,” said Voth.
“We’re still in a bull market, but corrections are needed in bull markets.”
The canola market traded limit up Monday and Tuesday and rallied $75 per tonne between the low on Jan. 22 and the high today.
He anticipates the market will lose steam once the participant who is short has found a seller.
Voth is surprised that the market took out the 2012 high of $691 per tonne because Agriculture Canada is forecasting this year’s carryout will be more than double what it was that year.
The government is forecasting 1.2 million tonnes of carryout for 2020-21. However, he is skeptical of that estimate.
In its January report Agriculture Canada increased exports by 700,000 tonnes from the previous month’s estimate, but it dropped its crush forecast by the identical amount.
Voth said that doesn’t make any sense because crush margins are attractive.
“I would venture to say that the realistic carryout number is less than half of that (1.2 million tonnes) right now,” he said.
That is why he feels prices are supported at today’s levels but he doesn’t know how much further they can climb.
Neil Blue, crop market analyst with Alberta Agriculture, said the next target is the 2008 high of $744.50 per tonne.
“It’s not impossible we could take (that) out. I’m not going to predict it, but it’s sure not impossible,” he said.
Voth thinks that is doubtful. He noted that the 2008 high was established in March, which is the delivery month for the March contract. So the contract wasn’t being used as a hedging tool at that time.
He noted that the 2008 market fundamentals did not support a price of $744.50 per tonne. Canola supplies were not as tight as they are today.
Commodity markets were frothy back then because of the hype and hysteria of fund money moving into commodities in droves due to the global economic meltdown.
Fundamentals are certainly different today. Blue noted that canola futures markets are in an inverse position where the nearby contracts are higher than the deferred contracts.
“That’s a sign of an extremely strong market, and I don’t think I’ve seen an inverse quite this strong before,” he said.
The May contract closed at $678 per tonne on Jan. 27. The market is telling growers it wants their canola now more than it does later in the year, said Blue.
One of the reasons is that Brazil starts harvesting its soybean crop in February and March, and it will hit the market soon after, he said.
Voth noted that the March and May contracts are eventually going to have to converge on March 12 when the March contract comes off the board.
Eventually that $39 per tonne spread is going to narrow. That could happen by March contract prices falling or May prices rising. He thinks it will likely be a combination of the two.
Blue said today’s prices are extremely profitable and farmers should be setting target prices and selling in increments rather than trying to predict the peak in the market because things can change in a hurry.
“What we’re into now is high prices, which tend to be volatile prices,” he said.