Since the beginning of May, oilseed markets have declined from their highs. In some cases, they've broken through what had been uptrend chart support lines drawn all the way back to the December lows.
There are many factors driving grain market volatility. Weather in North America and Europe is gaining market influence. Macro-markets are very much on edge with Greece and the euro situation. Technical traders demand a strong close -- back above key moving averages -- before they feel more confident that prices can bounce back. Otherwise they fear continued speculative fund liquidation for the commodity sector as a whole.
Headline excitement will be needed to continue feeding the rally in grain and oilseed markets. PFCanada is already sold out on old crop canola and soybeans and metering in new crop forward contracting of expected 2012 oilseed production. As agronomic hurdles are cleared, our bias remains to advance new crop sales as periodic bounces in the market occur.
The tight supply situation on oilseeds here at home and abroad is not a new story. It’s been with us for some time and will be for a while yet. That remains the underlying supportive feature of these markets.
But a lot of that market anxiety has been front-loaded into current market prices and inspired the winter/spring rally to contract highs. End-users are more aggressively forward buying than normal out of fear of tightening near-term supplies and worry that prices may rise further. Through the winter, the speculative commodity had amassed a record large long position in oilseed futures markets, looking to realize capital gain.
In order to inspire a bullish leg higher in these markets, a new catalyst will be required. It could be in the form of a new crop production threat here in North America (none are immediately present) or a surprise surge in demand. That could happen, but higher prices also tend to start a process of demand destruction, and I think we are already on that path.
North America is experiencing a decent seeding season, and the early prospect of large ag production. Gone for now at least is the near-term crop threat catalyst. That, of course, could change with the weather as the summer progresses, but that's the circumstance today.
To be honest, a stabilizing trend to oilseed markets up here may be beneficial to farmers in the longer term. I would rather see a long period of profitable prices for all than a spike to some astronomical level with corresponding frenzied down move that few can profit from. In other words, $12 to $13 a bushel cash canola prices with large crops to sell is preferable to $15 a bushel and no crop to sell (that is, prices go higher as crops fail).
The specific fundamental dynamics of the oilseed market remains bullish enough to maintain high price levels into the foreseeable future. Demand remains strong here. But my concern still resides with a more heavily forward bought commercial sector for this time of year. This creates the possibility of a demand hole later in the season, especially if new crop production prospects look fruitful.
And from the macro-economic world, global investors continue to take their cue from evolving conditions in Europe, China and the United States. Should economic conditions deteriorate further, that will accelerate the "risk off" sentiment, which recently pulled speculative money from all commodity sectors, including agriculture -- fundamentals be damned -- at least temporarily.
Demand shall remain good and surface in layers as long as China’s economy does not slow considerably. China can on paper make crush margin at prevailing new crop price. But that doesn’t mean China will buy volume today (they are astute at picking spots, including allowing long liquidation to run course), but offers the demand reason why canola price outlook remains profitable for growers.
If we are indeed entering a seasonal turn lower for the canola market, the downside target could be that Fibonacci retracement range between the 62 per cent and 50 per cent levels of the entire winter/spring rally span. On the chart of new crop November canola futures, taking a measurement from the low of December to the highs of April/May, is about $105 a tonne. A corrective retracement to the 62 to 50 per cent range of that rally would not be out of the norm, especially in this case, should the process of spec fund long liquidation continue. That puts a downside target between $545 to $533 a tonne.
From that level, I suspect canola fundamentals are strong enough to support the market until at least the growing season matures. If weather remains good until harvest, expect the harvest low to be set in advance of harvest.
As for chart resistance, I warned previously of a possible double top in the making on the November chart in that $580 to $585 a tonne area. This seems to be solidly entrenched as overhead resistance for now. A move to that level would certainly get me very interested to advance new crop forward marketing.
Mike Jubinville of Pro Farmer Canada offers information on commodity markets and marketing strategies. Call 204-654-4290 or visit www.pfcanada.com to find out more about his services.