Canola: Cheap but under pressure of both the coming harvest.

Stakes are High

Along with every traders, farmers, agri-processors after last year brutal drought/this year bizarre temperature, rainfall patterns and with cold lumps that we see coming, I have seldom seen uncertainties as intense.

Stakes are high ­=­­> Farmers have listen to the market and sow record levels.

Stakes are high=> Commercials are short of old crops since months and desperately need big volume to replenish inventories.

Like everybody involved in the trade pretty much all I think these days  is about the upcoming #harvest13.

Daily Market’s auctions are the price advertisement mechanism that will balance buyers/sellers.

It’s the purest form of what Economists repeatedly call,  the Law of supply and demand.

So let’s see the markets at work !

rsn13 head and shoulders top

I use the 5 years weekly chart, a long time frame and I note this Head-and Shoulders Top Pattern. Price projections from the head and shoulders top are really straightforward. I measure the distance in dollars from the neckline to the top of the head. This distance is projected downward from the breakdown from the neckline after the right shoulder. On the chart, the Distance between the neckline and the head is approximately 120C$. Subtracting 120C$ from the neckline gives you a target of 400-420C$/MT for 14′.  This potential target is strictly from the Chart viewer point of view. There is nothing that prevents the market attempting to break the neckline. What is imperative to assess is a) the direction of the market and b) how the market facilitates this attempt. The Trade in Action. On AUG 26TH, after weeks of paper short covering/ forward sales contract physical covering, we saw a market attempt to break the upside of the neckline and it failed.

ICE Canada Canola

ICE Canada Canola

On August 26, the market attempted a return to the neckline . Heavy Volume on the break tells the chart watcher that many longs were liquidating their positions and the down trend is likely to continue. ( Under Harvest Pressure. Adding this long-term piece of market information to the seasonality of the harvest (direct off-combine cash sales) in Sept-Oct, one can easily conclude that selling will undoubtedly stay in control of the market. Weather Rally on Soybeans A weather rally with or without Soybeans (which is itself capped by S. America planting intentions) could slow or reversed the down trend. Canola is Cheap, at a discount to Soybeans. Last time, I looked on the Canola discount vs Soy Oil it was 20% (24% in USD buying power terms), giving a potential leg/support for Canola. Some crush plants can switch to run either on Canola or Soybeans. Actually, the insight that I have is that Canadian crush plants are on maintenance/ or out of feedstock. Spreads This could explain why  the  Canola ICE/ CBOT Soybean Oil Spread (1:1) is going parabolic !; (the lack of crushing plants operating is someway preventing the inter-oilseeds arbitrage.)

Canadian Dollar vis-a-vis U.S Dollar and Chinese Yuan

 

Loonie

Canadian dollar vis-a-vis selected currencies

Canola is driven by export demand.

In Canada, Canola and its related products (meal, oil, seeds) are 85% exported* 

The Demand for exports can be generated from a sudden currency depreciation.

 So each 1% of currency depreciation has an enormous effect on Canola Pricing.

China and U.S are the two big importers of Canadian Canola products.

  • China : A stronger Yuan helps and supports large commodity purchases. As the Yuan is trending up Chinese can buy more for less.
  • For the United States, the currency discount for Canadian farmers is thin as Canadian Dollar remains high and its direction remains up.
  • CAD globex

A low Canadian Dollar as a Floor for crop cash prices. A high Canadian Dollar as a Cap for crop cash prices. I refer you to AG-economist and twitter Ag-Guru Philip Shaw @Agridome**. He has always some good thoughts about how the Loonie drives agricultural commodity pricing in Canada.

What I hope is a weaker Canadian dollar coinciding with the harvest (Sept-Oct). A lower loonie will boost the basis and acts as a Floor for Oilseeds farmers.

– The Trade Shipping and Finance Wizard

Note: ICE Canola is priced in C$ * Canadian Canola Council See https://jacquessimon506.wordpress.com/2013/06/08/canola-rapeseed-oilseed-vs-soy-oil/

commodities wall

 

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