Canola: The Inevitable Decline...Happened!
Last month I said canola will inevitably have a decline and it happened this week.
In the last three days, canola has declined $57t on the May futures as I write this.
On the week, canola is only down $10t showing just how fast the runup happened.
Keep an eye out for the Western Canadian Wheat Growers email newsletter next month because I talk about support and resistance on canola with past president Levi Wood.
I believe the fundamental picture has not changed with tight canola supplies so we could see a return back to the previous highs.
I've been active in talking to clients about incrementally selling into this rally either with old crop they have or by using the futures for protection.
I'm not an analyst that is going to call the top of the markets, but what I can do is present the various factors on where canola may be headed.
What helped cause the recent increase & decline?
The runup this month can be partly attributed to all short March positions needing to be covered.
As short positions were covered (ie traders had to buy the March futures), this helped cause the futures to increase.
With the May contract going to be the front month, the canola crush index was greatly over valued.
We have seen the index come back to more relative levels.
Soy markets supported the rally earlier this month for canola, but now could be weakening (discussed more below in soybean section).
Generally speaking, if you don't want to forward sell any new crop buying put options might be the way to go for protection.
If you think the supply situation isn't changing anytime soon, you may want to consider buying canola once the futures settle.
I'm watching $680t on the May as short term support.
The closing day highs on all contracts can be used as resistance.
Canola May Futures - 1 Year
Chart sourced from Market Q
Wheat
All three wheat contracts made new highs this month.
There has been a false breakout on wheat charts with a pullback happening the last couple of days.
Currently, for the month on the May contract approx.....
Chicago wheat - Up 1 cent/bu
Kansas City wheat - Down 10 cents/bu
Minneapolis wheat - Down 5 cents/bu
A stronger U.S. Dollar and slow export sales are seen as negative forces.
The U.S. Central and Southern Plains dryness is being monitored closely in the weeks ahead.
Winter wheat in Northern and Eastern Europe went into dormancy in good condition and the cold weather may have peaked this week in the Black Sea region.
Positive longer term trends are still in place for wheat.
However, we can't rule out a pullback with the rest of the grains.
There still may be a push higher into the spring if weather issues arise, but for the time being there is a lower shorter term trend.
Minneapolis Wheat May Futures - 1 Year
Chart sourced from Market Q
Chicago Wheat May Futures - 1 Year
Chart sourced from Market Q
Kansas City Wheat May Futures - 1 Year
Chart sourced from Market Q
Soybeans
The harvest in South America is picking up speed leading traders to watch soybean futures closely.
Talk of harvest delays in Brazil have helped to provide some support earlier this month, but there are also reports about surging soybean planted acreage for the coming year.
Currently, too much rain right now in Brazil is an issue.
The late harvest could cause some quality issues and there is too much dry weather in parts of Argentina.
The forecast for Argentina seems to have turned drier for next week.
However, the soy markets are overbought and we could see some short term technical selling.
Soybeans and soybean oil experienced key reversals this week suggesting a short term peak could be in place.
Overall, fundamentals and weather could support soybeans to go higher longer term.
Pullbacks are expected in any bull market and that is what we could be experiencing now.
Soybean May Futures - 1 Year
Chart sourced from Market Q
Canadian Dollar
This week the Canadian Dollar hit a three year high.
A lower U.S. Dollar and surging oil prices are both main factors.
The Bank of Canada said our economy will see a solid and sustained rebound this year as COVID-19 vaccinations ramp up.
As economies around the world start to open more, this should help lift the price of oil further.
I've read report of $100 oil returning.
While I think $100 is a bit optimistic, it is looking like $70 could be in sight.
However, our loonie isn't keep the gains with today declining almost 1 cent.
Could the rally hitting a wall?
I definitely wanted to see 80 cents hold on the futures.
We could be seeing the Canadian Dollar back to trading in the 77.5-79.5 cent range unless other positive factors swing it higher.
If you are needing to convert funds to USD, now might not be a bad place to start given where the Canadian Dollar has been historically.
Canadian Dollar March Futures - 1 Year
Chart sourced from Market Q
Cattle
The demand outlook for cattle is strong, but outside forces are negative.
Live cattle futures are making new lows for the week today.
From a chart standpoint, April live cattle futures look ominously toppy.
This weeks low has been taken out today and it appears likely it will close lower on the month after making a contract high.
Cash fed cattle prices are stuck at $114, unable to push higher but still holding steady as futures fade away.
The downside in cash prices is likely somewhat limited, but there is no doubt that the packing industry is still commanding the tempo and direction of trade.
Short term trends for cattle are negative.
However, long term trends are still positive.
Feeder Cattle April Futures - 1 Year
Chart sourced from Market Q
Live Cattle June Futures - 1 Year
Chart sourced from Market Q