Friday, June 26, 2009

Fundamentals not strong enough

Just as prices started to claw their way into hedging territory, canola prices copped a sudden hammering this week. Grower bids have fallen the best part of A$50/t for both old and new crop after nearing our targets of A$600/t. But these big falls were mainly isolated to canola with bean markets only softer to the tune of A$10-15/t.

These big falls come at a time when the Canadian crop is getting smaller - last week the Canadian Wheat Board cut their crop to 10.2mmt, down 19% from last year’s 12.6mmt monster and the market range continues to contract with estimates in a wide range from 10-11.5mmt. Canadian weather forecasts have improved but plenty of damage appears to be done and unless the rain is extensive and widespread, much more will be required to attain average yields.

Rumours that China has cancelled some forward orders may have played a role, but it seems these cancellations were at the margins and haven’t significantly changed the S&D outlook. With global oilseed production and canola likely to fall this year, we are moving towards a much better fundamental situation.

Canola prices vs. beans are at the lowest levels in 5 years (for spot months), at a US$50/t discount, and back to near contract lows for new crop (at a US$11/t premium), both down US$30/t in a week.
It appears that much of the recent weakness has been inspired by the funds which have been pulling back their exposure in commodities. As one of the more thinly traded markets we feel that the punishment dished out to canola may have been overdone.

That said, we can’t see much on the fundamental horizon, near-term, that is going to be strong enough to push markets back to recent highs. We are a little wary of the Nth American planting intentions reports, due out on the 23rd and 30th of this month, from Stats Can and the USDA respectively. These agencies both produced surprising reports in March, where the trade felt they low-balled canola and bean planting intentions across Canada and the US.

Canada could find another 0.5-1m acres – although recent weather will negate the impact. The wild card could be beans. The USDA could easily find 2-5m acres thanks to switches from corn, wheat and idle land to beans as planting delays and higher prices have encouraged farmers. A plantings shock is all we need in the current environment where outside markets are providing limited support.

If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription. Click HERE to subscribe online or Click HERE for a 4-week FREE Trial

No comments: