Deferred delivery | Oversupply may force growers to sell at lower prices to free up bin space
Canola prices might be getting close to the lows for the crop year, but don’t expect a significant improvement in the market until 2015.
That’s the assessment of Mike Jubinville, head analyst at Pro Farmer Canada.
“We are carving out the bottom (of the market). We are seeing potentially the worst of it in this current environment right now,” he told CropSphere in Saskatoon Jan. 14.
“In three to six months time, we are not going to have the fluid delivery system that we saw last year by any means, or the kind of basis levels. Basis is going to stay poor all year long, but I think it might start getting better. Some fluidity will come to the system as we move out of winter and into the summer.”
However, marketing will be a challenge even with modest improvement.
Jubinville said canola ending stocks could hit a record high of three million tonnes, up from 608,100 tonnes last year.
“There is demand offshore to move more canola, but we can’t sell more,” he said.
“Our booking schedule is set right out to spring time, the early part of summer.”
This crop year started off slow for domestic crushers because of a lack of seed until after harvest. Weekly crush has since picked up, but the total to date still runs behind last year’s pace.
Transportation problems are keeping canola values lower than what they should be given the wider oilseed complex. The falling futures price is compounded by an exceptionally wide country basis, which knocks the cash price down even more.
That contrasts sharply with U.S. soybean prices, which held up well this fall thanks to a tight supply, a robust export program and strong soy meal prices.
U.S. soybean export sales on the books could exceed this year’s production and draw down year end stocks, but Jubinville expects some of those sales will be cancelled or delayed once South America’s harvest is ready to move.
Palm oil values are coming off recent highs in December as production prospects improve in Malaysia.
Also, India increased its duty on processed palm oil products to 10 percent from 7.5 percent, reducing the amount that key producers Malaysia and Indonesia will export. Soy oil prices have also fallen.
“My gut feeling tells me a breakdown is coming here,” Jubinville said.
Soybean futures could drop if cancellations and delays become common.
The impact on canola futures would be limited because they have already fallen so much, but there still is the potential for them to fall further, possibly to a long-term technical support level of $375, which was last seen in early 2010.
However, it shouldn’t stay at those lows because it is grossly underpriced compared to soybeans.
Jubinville said canola tends to carry about a $50 per tonne premium over soybeans, but it is now at about a $100 discount.
“Canola is dirt cheap from the buyers’ perspective,” he said.
The already wide discount means there is little further downside risk for canola prices, but the potential for a rally is unclear.
“Something is going to change in a short period of time. Is it going to be soybeans going down to canola, or canola going up to soybeans or meeting somewhere in the middle? That is yet to be seen.”
He said Canada’s transportation problems have not only caused negative basis in the countryside to widen, but grain companies are increasing the positive basis at port.
Positive basis is the premium over the futures that buyers pay.
The premium is to account ship demurrage costs and risk over the grain companies’ ability to meet any new sales commitments.
He said farmers don’t like selling at prices well below what was available in the last couple of years, but most of them will have to move crop, if for no other reason than to clear up bin space for this year’s coming harvest.
“We are going to have to work a little harder in terms of our marketing,” he said.
“We’ll have to look at deferred delivery opportunities for remaining old crop to try to capture some of that carry in the market … that is paying you to store. And you are going to have to watch for sporadic basis opportunities that will materialize in your local markets from time to time.”
Even with its lower price, canola is still among the top crops in terms of outlooks for revenue per acre in 2014-15.
Special crops such as red lentils, canaryseed and yellow mustard also appear relatively stronger than wheat, durum and oats. However, they are niche crops and can’t be counted on to take significant numbers of acres.
Jubinville said farmers who are considering growing those specialty crops should take steps now to lock in prices because of the risk of overproduction in 2014-15.