Farmers might have long faces from bad canola basis levels for most of the fall, but some analysts think they might find much to smile about in the new year.
Buyers’ hunger for canola should strengthen after the present futures rally settles and the cash market chews through enough of the 2016-17 crop.
“We think demand should be pretty good throughout the year,” said John Driedger of FarmLink Marketing.
Harold Davis of Prairie Crop Charts was similarly optimistic. The next few weeks might be choppy, following a seasonal pattern of range-bound trade into early January, but prices should then be able to gradually rise through the winter.
“I predict the situation will look better and better right into June,” said Davis, who specializes in analyzing market trends and cycles.
Farmers have faced bad basis levels this fall, disappointing many. The futures market has seen a strong rally, rising from below $475 per tonne in early September to about $520 in early December, but a significant chunk of those gains were lost to widening basis levels.
Davis said average basis near the end of November was 56 cents per bushel under in Manitoba, $1 in Saskatchewan and 97 cents in Alberta.
For Saskatchewan, the 10-year average is 66 cents under and the five year is 46 cents under, making this year much worse than usual.
“They have been really stinky,” said Davis.
“I think the basis levels were presaging a big crop.”
Davis thinks country buyers didn’t buy futures traders’ beliefs that the prairie crop had been much reduced from earlier expectations. They thought much of the weather-affected crop could be harvested and would be coming in soon.
“The elevators seem to have known more than the analysts,” said Davis.
Driedger thinks the continuing in-flow of newly harvested canola has pushed basis levels wider than usual and extended the traditional period of harvest weakness.
“There’s a lot of canola that’s been taken off with too-high moisture,” said Driedger.
“It ends up almost like a second harvest pressure.”
Statistics Canada’s December production report pegged the 2016 canola crop at 18.4 million tonnes, which would be the second largest in history.
Driedger and Davis said they expect to see the canola futures market consolidate now, with significant gains unlikely until after New Year’s. However, both were relatively bullish for 2017.
Davis said Canadian canola is relatively cheap compared to European canola, U.S. soybeans and Asian palm, so demand should remain strong. In an already positive vegetable oil market, that means canola could make some real gains.
“The floor is moving up,” said Davis. “I’m very bullish on global edible oils.”
Driedger said farmers harvested a large canola crop, but demand is strong, so that shouldn’t be a problem.
Crushers are making good margins and are processing as much as they can. That is likely to continue.
Farmers might find better basis levels as buyers begin bidding to replenish the export pipeline.