Tuesday, June 22, 2010

Time to pull the trigger on canola

There are strong signals that the canola market may be topping out. For those who haven't made use of the rally to hedge forward production, now is the time. Earlier last week we made a recommendation to hedge 15% of expected canola production.

The market has moved higher since then on longer-term forecasts calling for more wet weather in Canada - which may affect yield potential on canola crops already on the ground. We are advising to take advantage of this and make a further 15% forward sale.

Canola has now pushed to a US$76/t premium to beans, its highest in two years and back to the high end of the range (excluding the 2008 period when canola briefly shot well into the 100/t’s above beans).

Canola board crush margins have dropped $50/t in a week (the lowest in 2 years) and Canadian canola is trading a premium to EU rapeseed, which is very unusual.

These all suggest canola is doing (or has probably already done) a great job in rationing demand even with a 10-11mmt Canadian crop (they had been expecting +13mmt on large plantings).

On top of this, there are reports that the European rapeseed crop won’t reach earlier potential.

Nonetheless, canola is part of the global oilseed complex and cannot escape the fact that potential price upside will be limited to the prices of other vegetable oils (due to the high degree of substitutability between veg oils). The US soybean crop is in excellent condition and there are still plenty of soybeans available in Sth America.

Short-term short covering might see some further upside, but really it seems that once that is done, in order to sustain the rally we need to see something from beans and/or grains (which appears unlikely given strong US growing season conditions).

1 comment:

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