Vegetable oil rally sees canola price surpass soybeans

Soybean prices headed up on speculation that changes to a U.S. biodiesel blenders policy would spark domestic demand

Canola on the world market is trading on par with soybeans after more than a year of being at a significant discount.

The canola value calculation takes the cash vegetable oil price in China, backs it off for freight to Canada and then applies the Canada-U.S. dollar exchange rate.

Canola prices tend to follow soybean oil prices because the crop has 42 percent oil content versus 24 percent for soybeans.

The soybean value calculation comes from taking the soybean meal value in China, backing it off for freight to the United States and then adjusting for the exchange rate.

Canola was trading at a one percent premium to soybeans at one point last week, which is a significant change after a year-and-a-half of trading at a 10 to 15 percent discount.

Agri-Trend Marketing president Derek Squair said canola’s resurgence is because of the recent rally in soybean oil prices.

“Canola is following it, so we’re starting to catch up a little bit,” he said.

Soybean oil has been in part supported by hopes that the U.S. Congress would modify a biodiesel blender credit to a domestic production-only credit, thus limiting biodiesel imports and increasing demand for domestically produced, soybean oil-based biodiesel.

However, that change did not survive passage of the bill that included the biofuel measures and soy oil in recent days has been falling.

Squair noted that canola exports have been brisk for the first five months of the 2015-16 campaign.

Squair expects Canada to export 8.3 million tonnes of canola and crush another 7.8 million tonnes domestically for total use of 16.1 million tonnes.

He believes farmers harvested 15.6 million tonnes, which when added to 2.5 million tonnes of carryout from the previous year re-sults in 18.1 million tonnes of total supply.

That leaves two million tonnes of carryout and a manageable 12.4 percent stocks-to-use ratio.

Carryout has been as low as 800,000 tonnes and as high as 3.2 million tonnes in recent years.

“We’re kind of in the middle,” said Squair. “It’s not too bad.”

Statistics Canada pegged production at 17.2 million tonnes in its November estimate. If that were the case, carryout would blossom and prices would fall.

However, Squair said the trade puts no faith in that number. Canola futures temporarily dropped after the report was released but rallied later that day based on rising soybean oil prices and the beneficial exchange rate.

“If the industry believed that number, we would have been down $20 a tonne since that day in futures,” he said. “The trade just kind of brushed that off.”

Squair said the trade is becoming increasingly dismissive of Statistics Canada’s canola production estimates.

He believes basis levels will narrow as the industry realizes supplies will be tight.

However, Squair said will adjust his export number to seven million tonnes if canola trades at a five percent premium to soybeans for the remainder of the year, and that would drive up ending stocks and push down prices.

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