Canola’s demand is bright

Franck Groeneweg does a double take when he scans the basis levels at his local elevator.

“It’s amazing,” he said.

“We never thought it was going to tighten up like this.”

The basis level was $70 per tonne under the futures price when he signed his contract in November.

Last week, the Viterra elevator in Balgonie, Sask., was offering $7.40 under for short-term delivery, 31 cents over for November and $5 over for February.

He can’t recall when basis levels have looked so good that far into the future.

Groeneweg attributes the dramatic turnaround to a number of factors, including improved logistics.

“Our transportation issues have fixed themselves maybe a little quicker than expected,” he said.

Jonathon Driedger, senior market analyst with FarmLink Marketing Solutions, said the improvement has been staggering.

Two months ago grain companies were offering $30 under for new crop delivery. Today it is zero or even positive for the immediate post-harvest period.

“We’re talking a swing of $30 to $40 per tonne,” he said.

“It has really made a strong move even for that fall window, which I’ll admit surprised me a little bit.”

He thinks it has a lot to do with the slumping canola futures market, which is weighed down by prospects of a massive U.S. soybean crop despite faltering canola fields.

“The basis has had to do some of the heavy lifting to bring values back into line,” said Driedger.

Bruce Burnett, CWB weather and crop specialist, said grain industry officials are concerned that a large portion of the 2014 crop has been lost to flooding.

About 40 percent of Canada’s canola is produced in the waterlogged region of western Manitoba and eastern Saskatchewan.

That would explain why basis levels in those regions have improved more than they have in the western Prairies.

Louis Dreyfus Commodities in York­ton was offering a $15 positive basis for August delivery as of last week.

Burnett believes 3.5 to four million acres have been lost to flooding. He forecasts 14 to 15 million tonnes of canola production, down from 18 million tonnes last year.

“It has changed the dynamic for canola,” he said.

“It doesn’t look like we’re going to have a burdensome stock level at the end of the 2014-15 marketing year.”

Burnett expects basis levels to remain strong if production is what he is anticipating.

“You’d probably be looking at a basis improvement by next spring, certainly,” he said.

“You’ll see that seasonal improvement that we didn’t get this year.”

Driedger also forecasts 14.5 million tonnes of canola production.

“That is close to about two million tonnes lower than what we would have thought heading into the growing season,” he said.

Large areas have been drowned out, the crop that survived in the wet zone is struggling and there are dry patches in western Saskatchewan and the Peace region of Alberta.

He believes there is room for basis levels to further improve if futures values continue to sag or the crop condition continues to deteriorate.

“I would not be surprised, to be quite honest, if we continue to see them strengthen,” he said.

“Would I price today? I’m not sure that I would. I think there’s potentially some upside.”

Groeneweg doesn’t know whether he should be contracting new crop canola at today’s values.

He wonders if canola futures prices will eventually pull away from soybean values as the market digests the short canola crop and massive soybean crop.

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