Canola-soy spread related to oil content

China is still hungry for high oil canola, but heavy December deliveries limited futures in December

Some canola growers are wondering why the crop is trading at a discount to soybeans in North America when the two oilseeds are on par in the biggest export market.

Canola was at price parity with soybeans in China at the end of December after about a year-and-a-half of trading at a 10 to 15 percent discount.

Meanwhile, in North America, the January canola futures contract shortly before Christmas was the equivalent of US$7.84 per bushel, while the January soybean contract was $8.92 per bu.

Chuck Penner, analyst with LeftField Commodity Research, said the Chinese market has been more focused on oil than meal lately, which has propped up canola prices because the crop has more than twice the oil content of soybeans.

“In China, one of the suggestions has been that a large part of the rapeseed oil stocks that they’re sitting on are close to their best before date,” he said.

Penner believes that is what is driving the unexpectedly strong Chinese demand for Canadian canola.

Chinese importers paid an average of $433.19 per tonne for Canadian canola in November compared to $396.66 for U.S. soybeans.

There is a glut of meal and feed ingredients in China, including a massive stockpile of locally produced corn.

“The USDA has it at about 115 (million tonnes) but I’ve seen estimates as high as 175 million tonnes,” said Penner.

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It’s why China’s imports of U.S. corn and distillers grain have been falling in recent months.

“I think they’re flush with the feed ingredients,” he said.

Penner said it is the opposite situation in North America, which is still a meal driven market with nearby soybean futures higher than canola futures.

Lawrence Yakielashek, general manager of FarmLink Marketing Solutions, has another explanation. He said Canadian farmers have been extraordinarily eager to sell their canola in the first half of the 2015-16 marketing campaign.

“There’s a real big push right now. There’s a lot of guys that are opening up canola bins in the last month,” he said.

“You’ve got a lot of pressure on the nearby (futures) from guys who are wanting to move canola.”

Some canola is heating in bins because crop maturity was unusually uneven at harvest time because of late seeding and re-seeding.

“The headlands might have been greener than maybe the middle of the field, so you’ve definitely got some hot spots in the canola,” said Yakielashek.

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Unseasonably warm winter temperatures have contributed to the heating issue, which is forcing farmers to rush product to market.

Growers delivered 6.8 million tonnes of canola through week 18 of the crop year compared to 6.2 million tonnes a year ago, Canadian Grain Commission figures show.

Sales have also been brisk, especially to China and the European Union.

“Talking to a lot of grain companies, they’re saying that 65 percent of the crop has already been sold,” said Yakielashek.

Crusher demand has also been good. He is expecting a record eight million tonnes of canola to be processed in Canada.

He believes production is well below Statistics Canada’s November estimate of 17.2 million tonnes. He also believes canola supplies will start getting tight by mid-January, which is when prices should begin to rally to ration demand.

“I would anticipate that moving forward the margins are definitely going to reflect a premium for canola,” said Yakielashek.

He expects the market to really heat up in April-July.

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“The back end of the crop year is going to be tight.”