Canola prices have climbed in recent weeks despite prospects of a big crop on the way.
The oilseed has support from soybean oil, which in turn is being propped up by rising palm oil prices.
In recent weeks, there has been a dramatic rebound in soy oil prices that had been on a steady downward slide since spring.
Canola prices are closely linked to soy oil prices due to the high oil content of canola seed.
David Dzisiak, commercial leader of grains and oils for Dow AgroSciences Canada, said the soy oil rally stems from disappointing 2016 palm oil production.
“The output is falling off and that’s driving a rally in veg oil crops,” he said.
Palm oil prices have been rising due to the lingering effects of El Nino, which brought drought to Indonesia and Malaysia during the second half of 2015 and the beginning of 2016.
An article published in Indonesia Investments said Indonesia’s crude palm oil production is expected to be 31.5 million tonnes in 2016, down from earlier expectations of 36 million tonnes.
The article also states that palm oil demand has been strong due to the resurgence in economic activity in key export markets like China, India, the European Union and the United States, as well as at home in Indonesia.
Exports have been surging recently. Shipments out of Malaysia during the first half of August were up 31 percent compared to the first half of July.
Benchmark palm oil futures prices as of mid-August were up 21 percent compared to a month ago.
Dzisiak said the rising palm oil prices are offsetting the bearish news of a record U.S. soybean crop on the way.
“There is a surprising amount of bullishness in the market considering the size of some of these crops we’re looking at,” he said.
Canola crush margins have risen after collapsing in the spring, due to better oil prices and a long period of depressed seed prices. ICE Futures Canada reports margins at $130 above the November contract compared to $58 a year ago.
“It has been really rallying the last month or two,” said Dzisiak.
Arlan Suderman, chief commodities economist for INTL FCStone, said soy oil has been underpriced for too long considering the global soybean stocks-to-use ratio is under seven percent.
“That’s the tightest that we’ve been in modern day history.”
Suderman said the spread between soy meal and soy oil prices had gotten out of whack.
“We kind of had this wake-up call — wow, soy oil is underpriced. And so we had this big reaction,” he said.
In addition to support from palm oil, there was strength from rising crude oil prices because soybean oil is used in biodiesel.
Once the momentum shifted, there was a lot of covering of short positions in a thinly traded market, which fuelled the bull run for the commodity.
Global soy oil supplies are snug and it is an inelastic commodity, so prices could remain firm for a while.
“It’s difficult to ration demand with higher prices in soy oil,” said Suderman.
Meal values have trended down at the same time that oil values have been rising, but he thinks that will be short-lived.
Global meat production is climbing and soy meal is a key component of livestock rations. He estimates the world is going to require an extra 13 million tonnes of soybeans in 2017.
“That’s just for the pork and poultry. That doesn’t include the other components and uses of soybeans,” he said.