Tuesday, April 17, 2012

Canola – Where to from here..?

Okay so new crop canola prices have slumped $13 from Thursday to Monday, reaching a two week low of $563 ($597 WA). Is it a new downward phase or will prices continue to rally further in 2012? Although Profarmer has encouraged growers over the last couple of weeks to commence early hedging into the rally there are a few bullish and bearish factors to keep the market volatile going forward.


Bullish
Fundamentally bullish sentiment persist, lead by tightening old crop stocks in both canola and soybeans matched with burgeoning demand from China. The market will need record high yields and a jump in planted area just to avoid extreme tightness for the new crop season. In April the USDA reported South American production was 4.8mmt lower to 115.2mmt, this is a 20mmt decline since Nov. However further cuts may be warranted in the next report , with some private analysts cutting forecasts even lower.

China will remain a strong importer of US soybeans and fears of extremely tight new crop balance sheet has continued to provide underlying support. China’s Ministry expects April soybean imports to come in at 5.6mmt, +16% from March. The first three months of 2012, imports are now running 22% higher then last year.

Although recent rain was beneficial in Europe, the rapeseed crop may struggle to match last season's 19.1mmt.  Thus EU production will again be in deficit, and with Ukraine’s rapeseed crop also struggling means more big imports from Australia.

Although subsoil moisture in Australia is very high (especially in NSW), other key growing regions like Eyre Peninsula and WA haven’t had much of drink and most will be sowing into dry topsoil. Depending on whom you listen to it will also be a dry spring, raising prospects of washouts or reduced yields...?

Bearish
After rallying 247c since December speculative and fund money is heavily long in the oilseeds complex and if they choose to start cashing out of profitable positions (seen in this mornings sessions) it will weigh on the market leaving it vulnerable to speculative long liquidation.

US soybean acreage are likely to rise from the March report, with the bean/corn spread widening from +725c in early March to +825c. Weather and early crop development potential remains favourable, with the chance of increased selling pressure in the weeks ahead.

A record amount of canola is expected to be planted across the Canadian Prairies (+3 to 4 million acres above last years record 18.9ma) will also weigh on canola strong upside potential. And although the weather has turned a touch cooler over the last week keeping air seeders in the sheds, the crop will still be put in early maximizing yield potential. More moisture (rain and snow) has continued to fall, which helps improve soil moisture.

Global economic slowdown; of the 88mmt of projected soybeans exported in the 11/12 season, China alone accounts for 55mmt of this. First quarter Chinese growth (8.1%) for 2012 was released on Friday, which was lower then pundits had expected. Chinese demand will continue to be the canary in the commodity cole mine.

In response to good soil moisture profiles and high forward prices ABAREs forecast for canola is 3.0mmt. With planting kicking off along the East Coast this week, Australia is expected to have another record planted crop. For the first three months of the year, regions received between 100 – 300mm above average rain in NSW. The DPI has recently pegged state acreage at 548,350ha (+39% than 2011), with up to 80,000ha to be sown between Hillston and Griffith. Who would have thought this would have been the case a couple of years ago!

If Australia does produce a 3mmt crop and production is steady in the Northern Hemisphere, be cautious in bringing too much unpriced canola into harvest. Bear in mind last year’s harvest. After a then record crop was planted, which was followed by a kind spring, large volumes were cashed straight off the header. High oil content and the relative high price of canola compared to other grades also amplified the strong selling pressure. Prices dropped like a stone. From $540 in early November, prices slowly declined $69 to reach contract low in mid December. From then, prices traded within a $20 range for another two months before gaining some traction on the back of this latest rally. 

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