Unharvested acreage risk drives canola futures higher

Canola futures have rallied this month to reflect the difficulties in the prairie harvest and support from stronger soy oil values.

As of Oct. 10, 23 percent of Saskatchewan’s canola acreage had not yet been harvested, according to the province’s agriculture department.

That means more than two million acres of canola are still in the field in Saskatchewan alone, representing in the neighbourhood of two million tonnes of production.

And there are harvest problems in Alberta and Manitoba as well.

Most of the crop will eventually be combined if there is an extended dry period before the snow of winter settles in. But the current situation represents a risk, especially because the weather has not shown much co-operation this fall.

The official expectation was that the total supply of canola this crop year — the carry-in and the harvest — would be about the same as 2015-16 at about 18.4 million tonnes.

The forecast for total use, which is the combination of exports and domestic crush, was also about the same as last year.

Total use is a little behind last year’s pace in the first 10 weeks of the crop year. It is a case of the domestic crush running ahead of last year but exports lagging behind.

Canada’s crushers have processed 1.74 million tonnes, up 200,000 tonnes from 1.54 million last year at the same point.

Canola exports total 1.45 million tonnes, down 310,000 from 1.76 million last year, according to Canadian Grain Commission data.

ADVERTISMENT

It must be one of the few times, if ever, that domestic demand has run ahead of the export market. It reflects the huge investment in expanding the crush capacity in recent years.

Rising vegetable oil futures, specifically palm oil, also support canola.

Palm is supported by strong Chinese buying and by ideas that output from the world’s second largest producer, Malaysia, is weak, with analysts blaming a hangover from the El Nino dryness earlier this year.

Analyst Oil World forecasts that global supplies of vegetable oil and animal fat will remain fairly tight through the winter, which should support the price of canola with its large oil component. However, palm production should surge in the second half of 2017 as the effects of El Nino finally end.

Soybean futures, meanwhile, are hanging in steady even with a record large crop being harvested in the United States.

Export demand for U.S. soybeans has been strong, and a deal announced last week for Chinese buyers to take 5.1 million tonnes of U.S. soy in November and December reinforces the export market’s strength.

Generally, all North American crop futures markets traded higher last week, supported by strong export demand.

Wheat, which has been the weak man of the market, led the way higher on the grains side, sparked by a flurry of tenders from several major wheat importers that perhaps believe the wheat market can’t go much lower.

The big funds were in a heavy short position, meaning they all were positioned to benefit from further wheat price declines, so when the price rose there was a wave of short covering that fed the rally.

ADVERTISMENT

You might remember that similar short covering rallies also pushed up wheat prices in the autumn last year, but then its price dropped during the winter.

Quality wheat has some strength this year because weather has downgraded our crop and wheat in parts of the U.S., France and Russia. It looks like Australia also might have problems.

However, the overall volume of wheat around the world is huge, and millers can work with a greater range of quality than in the past, so there the opportunity for rising premiums on quality wheat is not unlimited.

Looking across crop markets, there is potential for another period of weakness.

If November turns dry and snow free on the Prairies, most of the canola will make it to the bin and the current risk premium could fall away.

The current crop buying binge could slow once users have needs met, and if the weather co-operates in South America, the market talk could focus on the potential for record production there.

So far, soybean seeding in Brazil is moving quickly with close to 20 percent in the ground, but it is a bit dry there, raising modest concerns.

Currently, the Pacific oscillation is in a neutral phase, meaning there is neither El Nino nor La Nina.

But last week, the U.S. Weather Service Climate Prediction Center said the progress toward a La Nina has resumed. It put the chance of achieving a La Nina status later this fall at 70 percent.

ADVERTISMENT

La Ninas sometime bring drier than normal weather to Argentina and greater than normal rain in the western Pacific, including Malaysia.