Markets nervous | The government has ‘millions and millions of tonnes of rapeseed oil in tanks,’ says grain trader
Expect lacklustre canola sales to China next year, says a grain trader.
Canola crush margins are terrible in China, and there isn’t much prospect of improvement.
“We haven’t seen demand for months,” said Glen Pownall, managing director of Peter Cremer Canada.
“I’ve been trading canola for a long, long time and I don’t think I’ve ever seen a situation where we’ve gone this long without trading a cargo to China.”
By his calculation, Chinese crushers are losing $26 for every tonne of canola they process.
The problem is a glut of vegetable oil on the market and in government hands because of the huge amount of soybean processing that is occurring.
The Chinese have an insatiable demand for soybean meal to feed the country’s 725 million hogs, but their vegetable oil demand has been flat.
That is resulting in excess soybean oil supply, which is depressing prices for all vegetable oil in that market.
Canola crushing margins depend highly on the oil component whereas soybeans depend more on the meal. Pownall estimates soybean crushers are making $30 for every tonne processed, which is phenomenal.
China’s canola crushing conundrum has reduced the country’s appetite for Canadian canola. Pownall expects Canada will ship three million tonnes to China this year, which is down from last year.
Canola exports to China total 1.078 million tonnes in the first three months of the crop year, according to Canadian Grain Commission statistics. Markets are also nervous about the Chinese government’s growing stockpile of rapeseed oil.
“The government has millions and millions of tonnes of rapeseed oil in tanks right now and you never know when they’re going to auction this off and put pressure on the market,” Pownall told Agri-Trend’s 2014 Farm Forum Event.
He expects the same lacklustre buying next year, so he is not bullish on canola because China is Canada’s largest customer.
Another bearish factor is the record-smashing U.S. soybean crop and what looks to be a great South American crop on the way.
There is good incentive for Brazilian farmers to plant soybeans. Brazil’s currency, the real, has depreciated by about 15 percent over the past few months, so US$10 per bushel soybean futures looks like $11.50 to the Brazilian farmer.
“He’s doing just fine and he’s going to continue to seed soybeans and market them,” said Pownall.
Conditions are optimal in South America with good soil moisture and no oppressive heat in the forecast.
“Things are looking stellar, but it’s very early in the growing season. They are just completing their planting,” he said.
Farmers in Argentina have been hording last year’s soybeans because their currency is nearly worthless. Pownall thinks yields could be down in that country as farmers avoid applying costly inputs.
Still, he anticipates a big South American soybean crop, which will put downward pressure on the entire oilseed complex.
One positive factor for canola is that Pownall feels the oilseed market will switch to an oil-driven market in 2015 after two years of being in a meal-driven market.
That is due to an oversupply of soybeans, an anticipated reduction in palm oil production and the expected reinstatement of the $1 per gallon U.S. biodiesel tax credit.
Another reason to be bullish about vegetable oil prices is the decline in sunflower production.
Sunflower oil usually sells at a big premium to soybean oil, but last year it was the second cheapest oil next to palm oil due to a huge jump in production. That put a cap on soybean oil prices, preventing any kind of rally throughout the year.
This year the sunflower oil premium is back because of production problems in Russia, which will result in improved demand for soybean and canola oil.
An oil driven market would support canola prices because of the crop’s high 44 percent oil content. That will help offset the bearish factor of China’s terrible crush margins.
“I’m predicting a range trade on canola between $400 and $450 (per tonne) this year,” said Pownall.
Growers should take advantage of any $10 per bu. prices they are offered.
Another bit of good news is that he believes the official Chinese government rapeseed production estimate is “completely fictitious.”
The government pays Chinese growers $200 per tonne more than the international price for the product.
This year the government bought 3.5 million tonnes of the crop.
“To me, their production couldn’t have been more than 3.5 million tonnes because why would any farmer in the world not take advantage of a price $200 over the international price?” said Pownall.
“I really think Chinese production is about half of what the official statistics show.”