Canada Markets

Old Crop Canola Losing Steam?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The daily May canola chart is struggling at resistance despite a higher close today. The middle study indicates a bearish cross-over of stochastic indicators on Feb. 20 with short-term momentum trending lower. The lower study indicates a collapse in futures spreads in the past two days which reflects a weakening fundamental outlook. (DTN graphic by Nick Scalise)

Old-crop canola cash and futures market are showing signs that could be cause for alarm. First was today's weak close in the May future. Despite a 15 3/4-cent gain in May soybeans, a higher close in bean oil and Canadian dollar weakness, canola posted only a $.60/metric tonne increase after facing late-session selling.

In the 11 trading sessions between Feb. 9 and Feb. 24, only two sessions failed to reach a new high in the May contract's uptrend. In the past five sessions, however, three days ended with a doji trading bar, which appears as a cross with the market's daily opening price and closing price equal or close to it. This is a sign of indecision within the market and in this case, a potential lack of conviction on the part of buyers who have supported the move higher.

An additional sign, as seen on the daily chart, is the formation of a candlestick pattern referred to as a spinning top. This is indicated by a short candlestick body with wicks seen both higher and lower. This is yet another indication of indecision on the part of buyers and sellers and a sign of a possible reversal when seen at the top of an uptrend such as this. This is seen on the Feb. 24 bar which is the day the May also hit its most recent high at $473.90/mt. This same pattern is also seen in last week's trade on the weekly chart (not shown) while it appears we may see a second one with this week's trading bar.

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The middle study on the attached chart shows momentum on the short-term daily chart to the downside, after a bearish cross-over on Feb. 20 while is in over-bought territory above 80%. Perhaps even more of a concern is the same bearish cross-over of indicators on the weekly chart with all indications that these indicators may roll-over and move into a lower trend.

Perhaps the most concerning trend is the sudden collapse in the old crop spreads as seen in the lower study, an indicator of how the commercial trade views the crop fundamentals and one of DTN's Six Factors used in analysis. The March/May spread (black line) weakened $7.40/mt on Tuesday and an additional $4.10 in today's trade to move from an inverse (March trading over the May) to a carry market. As well, the May/July (blue line) spread saw its inverse weaken $3.40/mt today to end at a narrow $1.20/mt inverse (May over the July) after trading close to even money during the session. The May/July spread has traded in inverse territory since Dec. 19 while reaching a maximum inverse of $6.80/mt. A move back into carry marks a sudden shift in sentiment in the market.

Another signal of weakening trade is a further widening of cash basis levels on the prairies, a definite sign of needs being met in the front months and easing concerns later in the summer months. The prairie average March delivery basis, based on accessible internet bids, was calculated at $29.05/mt under the May, $1.69/mt wider than calculated yesterday. At the same time, forward months also widened, with June widening $6.81/mt since yesterday to $14.76/mt under the July while July delivery widened $5.08/mt to $12.30/mt under the July.

Commercial stocks in the system were reported to remain high as of the most recent week 28 data at 1.397 mmt, 34.4% above year-ago volumes. A slide posted on social media circles in Winnipeg this week from an unknown source suggested 2014/15 ending stocks could top 2 mmt, far above the current 1.450 mmt currently estimated by Agriculture and Agri-Food Canada. This higher expectation is consistent with my last week's analysis which suggested that exports were 512,446 metric tonnes and domestic crush was 67,897 mt behind the steady pace needed to reach the government's demand estimates by the end of July.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

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