Canola futures generally drop if soybean futures fall. If soybeans jump, then canola futures also rise.
That synchronicity has been the norm for many years in the oilseed market, but canola may break from the pattern this year.
Dan Basse, an ag commodity expert based in Chicago, is bullish on canola but bearish on soybeans this year.
“The world has an abundance of oilseeds. Not canola, but oilseeds,” said Basse, who spoke at the Canola Council of Canada conference, held March 7-9 in Winnipeg.
Basse, who runs the research firm AgResource, cited a list of fundamentals that should support canola prices in 2017 and beyond:
- Global canola and rapeseed production has been flat in the last few years.
- Canadian canola stocks have dropped from three million tonnes at the end of the 2013-14 crop year to a projected 1.1 million tonnes at the end of 2016-17, based on Basse’s statistics.
- China has been selling its reserves of canola oil, but that may cease this summer.
- The U.S. Federal Reserve is poised to raise interest rate, and Basse is bullish on the U.S. dollar.
“There’s nothing bearish that I see about the canola balance sheet, as it sits here today,” said Basse, who offered a price range for canola futures over the next year or so. He said the upper end of the range is C$550 per tonne and the lower end is $400 a tonne.
“We see the market trading within that range with rallies being capped by the abundance of oilseeds everywhere else.”
New crop canola was trading around $500 per tonne March 13 on the ICE Futures platform in Winnipeg.
One critical factor supporting canola could be Chinese stockpiles of canola-rapeseed oil. Basse said China has been auctioning off its strategic stocks of the oil, and supplies have dropped accordingly.
Stocks were four million tonnes in 2015 and may soon drop to two million tonnes, which should support demand for new crop canola.
“China has released a record amount of rape and canola oil from reserves. That is about to stop,” said Basse. “I’m told from my Chinese clients that they really don’t want to get (below) two million tonnes. They like to have that amount in strategic reserves.”
Basse also showed a chart comparing the U.S. dollar to world currencies since 2012. It illustrated the relative strength of the greenback, and he expects that dominance to continue.
“If you don’t have the U.S. dollar as your reserve currency, what is the alternative?”
A robust dollar means a relatively weak loonie and that supports canola exports and domestic crush.
So currency and supply-demand fundamentals look supportive for canola, but Basse said the opposite is true for soybeans.
The U.S. Department of Agriculture said last month that American soybean plantings will rise to near-parity with corn.
“Corn plantings for 2017 are projected at 90 million acres, down four million from last year,” the USDA said in a Feb. 24 outlook.
“Soybean plantings are expected to total 88 million acres, up 4.6 million from a year ago and 5.8 million higher than last year’s intentions.”
Farther south, Brazil and Argentina farmers are harvesting record soybean crops. Yields are “off the charts” in Brazil, Basse said.
AgRural, a farm consultancy in Brazil, has estimated national yields at 46 bushels per acre with many states setting yield records.
Basse said Brazilian soybean production could top 110 million tonnes, up from 97 million tonnes in 2015-16. The combination of increased acres and record production could propel soybean stocks in the U.S., Brazil and Argentina much higher.
“That’s a lot of beans and a lot of supply.”
More favourable fundamentals for canola should help Canadian growers, Basse said, but buyers of oilseeds and vegetable oil will likely switch to alternatives if canola gets too pricey.