Monday, March 15, 2010

V-turn ahead for oilseeds

Oilseeds copped the markets wrath late last week after initially rising after a supportive USDA report. News that China was cancelling some US soybean sales dovetailed with jitters over a drop in Chinese soy demand as that nation attempts to quell inflation, a negative US weekly soybean export sales report and mounting production estimates out of Sth America. While the news on the canola front was much less confronting it is hard to see canola prices avoiding the v-turn ahead of the oilseed complex.

The market was spooked after China’s February CPI was pegged at a 16 month high of 2.7%, while another report revealed housing prices rose at a rate exceeding 10%. A further tightening in Chinese monetary policy now looks a certain bet. Trade concern pivots on the impact this may have on Chinese demand for soybeans and they didn’t have to wait long; last week the USDA announced cancellations of exports sales of US beans for China and other unknown destinations.

Delays at Sth American ports have prevented further cancellations and, for now, have prevented nearby futures from gathering enough momentum to challenge contract lows of around $9/bu. There is over 4mmt’s of soybeans waiting to load at Brazil’s 3 primary ports which is causing delays as long as 20-22 days.

Meanwhile, while demand is backing off, crop estimates are rising. The Buenos Aires Grains Exchange bumped its Argie soy crop up to 53.5mt; while an Argentine farm group (ACSOJA) has raised their Argentine soy crop estimate to 55mmt – both estimates are above last Wednesday’s USDA crop estimate of 53mmt.

Brazilian soy crop estimates also continue to grow with ABIOVE – Brazil’s soy processing association - weighing in with a 67.6mmt crop, which is above most analysts expectations.

While compared to beans, the canola balance sheet is reasonably well-balanced - with a heavily laden global soybean balance sheet - canola will most likely be challenged to sustain rallies in the near-term.

Although there are reasons to expect some rallies in the weeks ahead; solid Canadian crusher and export demand, China trade resolution (once their local crop has cleared the decks), weather worries (Western Canada is too dry and eastern Canada too wet), speculative short-covering, soy-oil support (oil value is holding reasonably well, it is the meal side that is dragging down values), with broader world oilseed supplies still at this time building faster than demand, it remains our view that periodic rallies must be sold and not considered (at least at this time) as any start to sustained upside potential.

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