Canola producers have been disappointed that canola has not rallied nearly as much as soybeans in the last few months. Many probably think the big prairie crop has a lot to do with the relative weakness of canola.
But that’s not likely the case. There’s huge demand for canola, and the big Canadian crop doesn’t show any signs of having problems getting consumed in 2012-13. The reason canola’s lagging soybeans is more likely to do with the differences between soybeans and canola as vegetable oil crops. Canola truly is a vegetable oil crop, with about 45 percent of its weight consisting of oil – and a much higher proportion of its value in the oil – whereas soybeans are about 80 percent protein meal by weight and sometimes are dominated by meal values. Canola’s oil is often higher-priced than soybean oil, is produced in greater proportion within the seed of the canola plant, and canola meal has lower relative value than soybean oil. So canola is totally dependent on oil prices for its overall value, with the meal thrown in as a marginal product that is often sold as a discounted feed component.
Those dynamics seem to explain the situation now. Look at the chart below comparing the recent performance of soybeans, canola and soy oil. Soybeans are a lot stronger than soy oil, revealing the shortness of the U.S. and world soybean crops and future soybean meal supplies and the relatively more comfortable situation of vegetable oil. Canola’s actually been firm compared to soy oil, so the situation is better than it could be.
As analyst Greg Kostal always points out to me, “Canola is just another vegetable oil consuming choice,” so if you want to compare canola to something, look to soy oil, not soybeans.