I’m out at Manitoba Ag Days in Brandon, and as brutally cold as it is outside (I’m about to find out if my car will start this morning), farmers are glowing with optimism about the coming year.
There’s a lot of anxiety amongst producers, from what I can pick up, about saturated soils that will make growing a crop this spring and summer a production challenge. But with high and rising prices for virtually every crop, it’s hard not to feel confident about the future.
But that’s a danger, a couple of analysts I listened to yesterday were saying. Markets are never one-direction only, but that’s what many have seemed like lately.
Look at the path canola prices have followed recently:
Both Jonathon Driedger of FarmLink Marketing Solutions and David Drozd of Ag-Chieve highlighted the possibility of a substantial correction in canola prices in their presentations to growers yesterday. Neither thinks the rising prices for most crops – including canola – are over in a medium-term way, but the next couple of months could be choppy, both said. The point of a “correction” is that it brings prices that have been rising too fast too long back into a more reasonable up-channel. Driedger noted that a short term correction could help the bull market in canola last longer, even if it’s unpleasant while it’s happening.
“We could actually have a pretty good correction and not necessarily break the longer term trend line going all the way back to June,” said Driedger.
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Prices had been softening for most of the previous month, but heading into the Labour Day long weekend, the price drops were startling.
“In some ways maybe a bit of a correction would be almost healthy.”
If prices rise too fast too soon, demand could be prematurely choked-off and end the rally before farmers are able to lock in juicy late-2010-11 prices and 2011-12 prices. So a little set-back might take some of the pressure off of canola buyers and allow more time for farmers to get comfortable with their 2011-12 crop and get some more pricing done if there is a correction and then a return to rising prices.
The reason Driedger – like almost all canola market watchers – is medium-term bullish about canola prices is because of low levels of both canola and corn stocks. Low corn stocks gives support for all the other crops because it’s the dominant North American crop in terms of prices. Low canola prices suggest buyers are going to be anxious a few months from now about filling their requirements.
Here’s a photo of Jon standing in front of a slide showing the low carryout levels for canola that have buyers worried:
David Drozd also thinks a correction to canola prices is likely. As a technical analyst, he’s less concerned about the underlying fundamental, supply and demand reasons for a pull-back than he is about chart patterns that suggest a short-term reversal is likely and about seasonal trends that suggest that prices tend to fall between February and March. Especially with massive speculative positions in March futures contracts needing to be unwound, there’s a chance a lot of longs will liquidate in a way that sends prices south.
“The market, if it’s going to correct, this is a place it could do it,” said Drozd. (I wrote about Drozd’s expectations of a correction a couple of weeks ago in this blog and in the newspaper, so I won’t go into detail about his reasoning here.)
So the mood is pretty good here in Brandon this year, which is nice. Some years there’s a rather grim feel, if everyone’s losing money. But with farmers walking around the sprawling trade show seeing posted offers like $13-something for new crop Nexera canola, it’s hard not to see profits greeting the 2011-12 crop.
But as Driedger and Drozd warn, prices might not go straight up from here, and producers may want to think about protecting some of today’s nice new crop and old crop prices now, because there might be a correction in front of us sometime soon.
