Slumping vegetable oil prices have been bad news for canola, says an analyst.
Soybean oil futures prices have been on a steady downward slide since 2011, falling to US25 cents per pound from 60 cents.
Large crops in the United States and South America, rising oil content in those crops and strong demand for soybean meal have created a glut of soybean oil, said Neil Blue, crop market analyst with Alberta Agriculture.
It doesn’t bode well for canola prices because they are heavily influenced by soybean oil prices.
The impact of slumping vegetable oil prices has been partially offset by the weak Canadian dollar because most commodities are traded in U.S. dollars.
“This is buffering us on all our crops,” said Blue.
Soybean oil prices will likely remain under pressure as a near-record U.S. crop is harvested on top of a record South American crop.
One bullish factor for vegetable oil prices is El Nino, which has caused drought in Malaysia and Indonesia, the world’s two leading producers of palm oil.
Rainfall during the most recent growing season has been half of normal, said Blue.
“There is quite a time lag between weather events and production, so what it could imply is that later on in our winter here their production may fall off,” he said.
“It will negatively impact palm oil production in the next six to eight months and maybe even longer.”
An article published on the Indonesia Investments website said crude palm oil output in Indonesia may fall by 20 percent next year because of El Nino. Six Indonesian provinces have declared a state of emergency.
Blue said the palm oil crisis has the potential to partially offset the glut of soybean oil on the market, although palm oil trades at a $150 per ton discount to soybean oil.
“It has the potential to be a positive for our canola market,” said Blue.
Another bullish factor is a potential change in market psychology.
“The speculator is probably for the most part short in a falling market like this, and eventually that will turn around for various reasons,” he said.
“That can turn the market around fairly quickly sometimes when these short sellers decide to cover their positions.”
Growers are not the only ones feeling the pinch of slumping vegetable oil prices.
The canola board crush margin dropped to less than $50 last week from more than $200 per tonne in February 2014, even as the Canadian dollar has weakened.
The canola board crush margin is a calculation that does not reflect actual crush margins, but it does provide a good indication of the magnitude by which margins have deteriorated.
If the situation does not improve, it will likely mean crushers will not operate at full capacity in 2015-16.
Blue said growers will need to keep a close eye on basis levels, which typically rise from January through July.
They also need to note that they can inadvertently move prices by shifting their attention to marketing other crops.
“Farmers, when they act together, can have a bit of an influence,” he said.
“That may not be a co-ordinated effort at all, but it may just happen.”