Ample veg oil grounds canola rally

Analyst says prices have risen to a point where customers will start to switch oils

Growers may turn purple holding their breath for a further price rally in the yellow crop, says a grain trader.

Jerry Klassen, manager of the Canadian office for Swiss firm GAP SA Grains and Produits, thinks canola’s run is over.

“If you don’t see strength in the bean oil, I don’t think it can go too much further,” he said.

Klassen sees no signs of a strengthening vegetable oil complex with a big U.S. soybean crop on the way and no serious issues with palm oil production.

Nearby canola futures were trading at $532 per tonne earlier this week, up $90 per tonne from the spring lows on concerns over tightening supplies.

The U.S. Department of Agriculture expects the 2015-16 world soybean stocks-to-use ratio to increase 10 percent over last year, while the canola-rapeseed stocks-to-use ratio is expected to plummet more than 30 percent year-on-year.

Klassen believes canola prices have already risen to a point where customers who can use other oils have made the switch.

ADVERTISMENT

Export markets such as China and the Middle East are on the sidelines because it appears Canada will only have enough new crop production to satisfy the needs of domestic customers and traditional markets such as the United States, Japan and Mexico.

Klassen is forecasting 12.8 million tonnes of production based on an average yield of 29 bushels per acre, which is in line with other trade expectations.

That would be the smallest crop since 2010 and well below last year’s 15.6 million tonne harvest.

Farmers in the heart of the drought think yields will be lower, but Klassen cautions that good crops are on the way in Manitoba, North Dakota, eastern Saskatchewan and the irrigated districts of Alberta.

“You have to be very careful that you don’t underestimate the canola yields too much,” he said.

If the market thought the average yield was going to be 22 to 25 bu. per acre, the futures price would already be at $600 per tonne.

ADVERTISMENT

Klassen said yields will pretty much be set once flowering is over.

“The fact that we have kind of traded sideways here for the last week and a half kind of suggests that the industry is pretty comfortable with this price level and current production estimate,” he said.

Another factor keeping a lid on futures prices is the pace of grower deliveries. Farmers delivered 308,000 tonnes of the crop in the week ending July 5 and 393,000 tonnes the previous week.

That is enough canola to satisfy more than one month’s worth of demand.

The delivery numbers are surprisingly strong given how late it is in the season and how tight ending stocks will be, suggesting growers are happy with new crop prices of $11 to $11.50 per bu.

“It’s hard to get canola to rally $50 per tonne when you’ve got 400,000 tonnes pouring into the system on a weekly basis late in the crop year,” said Klassen.

ADVERTISMENT

“That’s another thing producers who are just focused on the dryness have to be aware of.”