Monday, November 3, 2008

Sprinters never win

ProFarmer is in Melbourne for the Cup this week. I know; bad timing with harvest on and all, but it is our one chance a year to catch up with about 20 close mates from all walks of life. Consensus of opinion is that Septimus is the best credentialed international runner to ever make the trip. It will be very hard to beat and it is at relatively juicy odds compared to other international raiders of the same ilk. By the time some of you read this, the Cup will be run and won – apologies if you get the tip late – or maybe not.

Road to recovery
Speaking of long journeys, the canola market looks like it may be on the long road to recovery. North American prices appear to be building quite a firm base and our bet is that there will be a few more surprises to the downside with regards to US bean production. Oilseed prices generally start to recover seasonally over the next few months as North American harvest supplies clear.

While prices remain susceptible to more bad economic news, given the amount of outside money that has flowed out of the past six months, the influence of this is diminishing.

In Canada, cash canola demand remains very strong with the domestic crush and exports currently running at a record strong pace. Commercial buyers seem to have re-assumed control of the markets. Again, while there are fears of demand slowing, there really is no evidence of such at this time; canola usage is record large so far in 2008/09 and the lower prices continue to draw in the end user.

Canola is now pretty attractively priced relative to US soybeans with prices about parity, whereas canola traditionally carries a notable premium. Also, the Chinese government a few weeks back started buying domestic soybeans to help support prices and to provide the incentive for its farmers to grow oilseeds. But as world prices tanked, it made more sense for importers to buy cheap global supplies.

Soybean import tax
According to Dow Jones last week, China's Finance Ministry is currently considering a boost to its soybean import tax from 3% to as much as 9%, though there's nothing firm yet. A move to that 9% level would position canola on a more competitive footing with beans, as canola is already subject to the tax at 9%. So if tax change occurs, it will mean that canola has a pricing edge at today's canola/soybean price relationship.

Concerns over the impact of a global recession on demand for commodities will limit speculative interest in commodities for the time being and mean that prices are not going to sprint higher. But this market seems to me to be building a firm fundamental base that will see prices stay the journey. And we all know that sprinters never win the Melbourne Cup.

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