Crushers crush despite poor margins

Canola crush margins are half what they were a year ago, but crushers are still making money and buying canola, says an analyst.

The ICE Futures canola board crush margin for the nearby futures contract on Oct. 6 was about $62 per tonne, down from $111 per tonne a year ago.

Ken Ball, senior commodity futures adviser with PI Financial Corp., said margins are down significantly from sky-high levels late last year and the beginning of this year when crushers were “grinning from ear-to-ear.”

However, today’s margins are not necessarily what crushers are experiencing. Actual operating margins are likely much higher because crushers used hedging to lock in values during the good times.

“They obviously recognized that they had extraordinary margins and would have booked their margins quite heavily forward in the futures market, I would think,” said Ball.

“I’m sure if they didn’t they might be out of a job.”

Even at the lower on-paper margins, crushers would still be making a “moderate” profit, although it would be borderline if they fell another $10 to $15 per tonne.

Members of the Canadian Oilseed Processors Association crushed 1.28 million tonnes of canola through the end of September compared to 1.35 million tonnes for the same period in 2016-17.

COPA executive director Chris Vervaet expects total Canadian crush for 2017-18 to be similar to last year’s total of 9.2 million tonnes.

“It’s shaping up that way right now,” he said.

None of his members have talked about curtailing production de-spite declining margins because demand is still strong for oil and meal and they want to keep their plants running.

Vervaet said rising costs are the main reason for falling margins.

“Seed prices continue to be quite robust, certainly if you compare it to the prices of the products we sell, which is the oil and the meal,” he said.

A strengthening Canadian dollar hasn’t helped matters. Canola oil and meal are priced relative to the Chicago Board of Trade soy oil and meal contracts priced in U.S. currency, so as the loonie rises Canadian crushers get less for their finished products.

“That certainly has worked against us,” said Vervaet.

Ball said another factor is that crushers are buying more aggressively than usual because they are nervous about tight supplies as well as the couple million tonnes of production remaining unharvested, primarily in northern Alberta.

“When projections are tight like that, commercials want to get the bulk of that buying done in that first 30 percent of the season so they don’t have to chase after each other for the production later on,” he said.

The canola supply and demand picture is indeed tight and likely getting tighter, despite expanding production estimates.

Statistics Canada released a canola production estimate of a record 19.7 million tonnes Sept. 19 based on models that use satellite images of crop vegetation.

That is up substantially from the agency’s survey-based estimate of 18.2 million tonnes released Aug. 31.

Ball said the trade believes the model-based estimate would result in 21.1 million tonnes of supply when combined with carryout from the 2016-17 crop.

That is similar to last year’s total supply of 21.8 million tonnes, which means crush and exports would have to be about the same as well to keep ending stocks from rising.

He believes crush will remain strong despite falling margins, and exports should be good because of solid demand and reduced competition from Australia. The Australian Oilseeds Federation is forecasting a crop of 2.9 million tonnes, down from 4.2 million tonnes last year.

Ball expects 500,000 to 600,000 tonnes of Canadian canola carryout in 2017-18, down from 1.35 million tonnes last year.

“That is intolerably tight,” he said.

“Of course, we never would actually get stocks to be that low, but just the projection that they’re getting in that range would certainly keep the market well underpinned.”

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