CANOLA HEDGE THOUGHTS
We have been in a time period of traditional seasonal strength in both oilseeds and feed grains. Currently, all the fears and concerns of crop planting and development are being “baked” into the grain and oilseed prices and have supported a 6 month rally. However, the seasonal strength historically ends by July, as all these fears and concerns pass or become known and are discounted in the price.
As a producer it will be important to lock down the critical portion of your canola crop during the next two months. Producers should be getting upwards of 40%-60% hedged by the middle of July, with a portion of the hedges being options based. Another weather concern and subsequent price rally are certainly possible in next several months, but these current price levels should not be missed on a reasonable portion of your production.
The basis for canola is historically wide. It is probably best to leave a portion of your canola basis floating, while waiting to sell at more normal levels. Any delays in canola plantings, coupled with slightly higher than expected soybean plantings in the US due to a late planting season, could help strengthen basis while depressing soybean/oilseed board values
Precipitation in the eastern regions of the Canadian prairies has been adding to the already excessively wet field conditions.
The Canadian Wheat Board said seeding operations on the Canadian prairies were only about 3% complete. Normally, about 40% of the intended crops would be planted by this time.
Significant weakness in soybean prices due to the bearish USDA reports released Wednesday have weighed on canola in the last several sessions. The negative USDA supply/demand report pegged soybean ending stocks at the close of the current crop year well above expectations.
Weather outlooks are calling for warmer and drier conditions next week in the Canadian prairies which should allow for some seeding progress.
The July 11 canola contract has been trading in a sideways to lower trading range since posting a 2011 high at 635.4 in mid-February.
The contract reached and held a key support area last week with is the green line 200 day moving average. The rally from this average, however, stalled under the blue line 40 day moving average which has turned the near term trend back lower.
The contract currently trading at 559.0 is again approaching the 200 day moving average at 550.0. If the 200 day moving average is broken as support, it would be a bearish technical event for the market turning last week’s low at 534.0 into the next support area to watch.
The lower 530.0 area has been primary support on two price dips since mid-March. A close under 530.0 would turn the longer term market trend back lower leaving 500.0 as the next downside support area. The 40 day moving average currently at 580.7 is the first area of resistance followed by 595.0-600.0 which is considered “breakout resistance”. This second resistance area is a trend line drawn over two highs dating back to the current 2011 high at 635.4. A rally over this trend line would be very bullish for the market which should lead to a new price high.
MGEX HRSW HEDGE THOUGHTS
The Dec contract briefly climbed over 10.00 a bushel as much of the wheat action is being pushed by continued dryness in the Southern Plains of the US, despite cold temps and snow in parts of the Northern Plains and Canada. Yet, the slightly bearish numbers in the USDA supply-demand report along with the improving weather forecasts in northern wheat growing regions should allow planting progress. Remember that the usual strong seasonal high in wheat remains intact this year with a late Feb. high in Dec wheat continuing to hold as this year’s high. Unquestionably, we have many weather worries around the world, and we could see yet another rally in prices. However, the current high prices and margins should not be ignored.
Unchanged from last week, wheat prices continue to trade at historic highs, but will be captive to changes in weather conditions and the macro economic outlook. The strong seasonal trend would expect lower prices in the months ahead, but the weakness will likely follow some positive news with regard to weather conditions.
Hedging upwards of 30% of your expected 2011 crop is warranted. Using put options can allow a producer to extend coverage to 50% hedged with a reasonable floor. Producers can set a floor that will allow for upside participation, provide some time to make sure you get a crop in the ground, and also allow the farmer to remain uncommitted to the Wheat Board until more is known about his crop.
MGEX HRSW FUNDAMENTALS
The wheat market traded independently higher to end last week due to a lower than expected KS wheat production figure (wheat tour estimate of 256.7 mbu) and dry weather in the southwest.
The USDA supply-demand report came out as expected. Old-crop U.S. balance table remained unchanged, matching trade expectations, while 2011/12 carryout fell by 137 mbu thanks to sharply lower production. Overall wheat production was 2043 mbu, matching the trade guess.
The wheat balance sheets were fairly neutral and the trade is likely to shift towards trading weather as crops in the northern hemisphere remain threatened in several key nations.
Rainfall this week may help ease stress to some northern and eastern HRW areas, but the southwest belt will miss most of this rain as crop prospects continue to decline.
The market ended last week on a negative tone in response to the broad based selloff in commodities due to the weaker technical picture and the overnight earthquake in Japan.
MGEX HRSW TECHNICALS
The July 11 Minneapolis wheat contract failed again in this week’s trade to rally over the 975’0-1000’0 resistance area. This is the third rally failure at this resistance area since early March and may mark a turn back lower for the contract.
The red line 10 day moving average was broken as support at the 928’0 level leaving the blue line 40 day moving average currently at 921’7 as the next primary support. If the 40 day moving average is broken, last week’s low at 883’6 will become the next support area to watch.
The mid-880’0 level which was a former resistance area in late 2010 has now become key support over the past 2 1/2 months. A close under 880’0 may indicate a top has been set in the market. Following support will then become the green line 200 day moving average currently at 847’5. 975’0-1000’0 remains key resistance. A close over 1000’0 will turn the longer term trend back higher leaving the 1054’6 February and 2011 high as the next upside resistance.Two major uncertainties lie ahead for all grain markets in the coming month. The first is the March 31st USDA planting intentions report which could be a major market influence through the early spring. The second large influence will be the direction of the world economies based on the outcomes of the Middle East uprisings. Certainly, no one can predict these events and therefore producers need to get their hedging plan updated and in place to protect results in the event of an adverse outcome in the market.
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