Analysts are becoming increasingly bullish about canola for a variety of reasons.

Glen Pownall, managing director of Peter Cremer Canada Ltd., said dry conditions in Canada and Australia have reduced yields in the two main exporting countries.

“I think things are going to be very tight, that’s for sure,” he said.

“Overall in Western Canada, I feel we’ve taken our production number down by a solid three million tonnes.”

He is forecasting 18 to 19 million tonnes of Canadian production, depending on how the crop fares in the southern Prairies, where it has been hot and dry.

Twenty percent of Saskatchewan’s 2016 canola crop was produced south of the Trans-Canada Highway, which is the real problem area. Pownall said the crop is looking much better in northern Saskatchewan and Alberta.

He is expecting good demand, especially out of China. Last year’s export program to China was delayed because of import restrictions surrounding blackleg disease.

“Now with an agreement in place, we’re going to have a full-out program starting right from day one into China. There’s going to be a big draw into that destination in particular,” said Pownall.

Dan Basse, president of Ag-Resource Company, agreed that China will be hungry for canola as the government reduces its rape oil auctions.

He is also forecasting strong demand out of the United States.

The U.S. Department of Commerce is contemplating slapping countervailing and antidumping duties on soybean biodiesel from Argentina and palm biodiesel from Indonesia

If that happens, there will be more demand for U.S. biodiesel and the soybean and canola oil used to make it.

“We were hoping that there was going to be more Canadian canola, but that doesn’t appear to be the case,” said Basse.

He is forecasting 18.2 million tonnes of Canadian production, which is below Agriculture Canada’s estimate of 18.75 million tonnes.

The Australian Oilseed Federation is forecasting a 3.1 million tonne harvest in that country, down from 4.2 million tonnes last year.

That is why Basse is forecasting a possible winter high for nearby canola futures of $575 to $600 per tonne, up from $507 at the end of last week. He doesn’t see much downside risk below $430 per tonne.

Pownall said the problem is that canola prices have already strengthened substantially relative to soybean prices with canola trading at more than a $50 premium.

It doesn’t help that the U.S. Department of Agriculture surprised markets last week with its sky-high average soybean yield estimate of 49.4 bushels per acre, which took the wind out of any further price rally.

However, other analysts are more bullish than Pownall.

Oil World says an “explosive situation” could be developing in the canola market because of dwindling production prospects in Canada and Australia despite the recent upward revision in European rapeseed production.

Chief executive officer Thomas Mielke recently told a group of Australian grain growers that there is little risk of canola dropping below current price levels because of low palm oil stocks.

According to a report in the Weekly Times, an Australian rural news service, Mielke said the palm industry is still recovering from the El Nino of 2015-16.

Bruce Burnett, director of markets and weather with Glacier FarmMedia, said Mielke’s comment about palm oil stocks is a head-scratcher.

“It’s hard to make sense of that statement. I don’t understand his logic on that,” he said.

According to a recent Reuters story, Malaysia’s palm oil inventories reached their highest level in over a year in July.

The USDA is forecasting 2.5 million tonnes of ending stocks in Malaysia in 2017, up 54 percent from the previous year.

It estimates Indonesia’s stocks will be 2.8 million tonnes, a 46 percent increase over 2016.

Burnett said that is not supportive of canola prices.

However, he agrees with Basse that tight supplies in Canada and Australia are bullish, especially if Canadian production drops below 18 million tonnes.