Canola demand prospects should be good in 2018-19, say market analysts.
Neil Townsend, senior market analyst with FarmLink Marketing Solutions, said the escalating trade spat between the United States and China will lead to record Canadian canola shipments to China.
“We’re projecting them to go up by 600,000 to 700,000 tonnes above their biggest previous program,” he said.
China has applied a 25 percent tariff on U.S. soybeans in a growing trade war that shows no signs of abating. The tariff took effect on July 6.
If the tariff stays in place or expands it will create a market in China for alternative oilseeds. However, Townsend warned that the new source of demand could evaporate as quickly as it materialized if there is a resolution to the dispute.
“The Chinese have a long history of cancelling cargoes and backing out of deals, so there is a risk there,” he said.
The anticipated strong export program to China and withering yields in Canada has Townsend optimistic about where canola prices are heading.
“Wheat looks like it’s going to be electric this year, and the canola has potential to be pretty strong,” he said.
Prior to its annual crop tour FarmLink was forecasting an average yield of 37.8 bushels per acre, which would have been very bullish.
However, the crops were in surprisingly good shape during the July 24-26 tour and the estimate was bumped up to a bearish 41.9 bu. per acre.
Since then, hot and dry conditions have knocked it back down closer to 40, which he considers neutral to mildly bullish. Anything below 40 would be getting back to very bullish territory.
Bruce Burnett, director of markets and weather with Glacier’s MarketsFarm, is also forecasting a 40 bu. per acre average following his crop tour.
He agreed there is upside potential for canola prices, but added that canola is already highly valued compared to soybeans.
“There is only so far that that spread can widen out,” said Burnett.
While China is the big story in canola markets, another development has gone under the radar. He said the drop in canola yields in the European Union and the Black Sea region due to drought has gone unnoticed.
The European crop monitor is forecasting an average yield that is 12 percent below the previous five-year average, and conditions have deteriorated since that report was released July 23.
Burnett said canola yields in Russia and Ukraine are dwindling along with wheat yields.
Australia’s crop is also being affected by drought. The Australian Oilseeds Federation is forecasting a 2.66 million tonne crop, down one million tonnes from the previous year. The federation noted there is no upside to that forecast.
Burnett said smaller crops in the Black Sea region and Australia should create additional demand for Canadian canola in Europe’s biodiesel market.
“I would say we’re going to do a big program to there,” he said.
He believes there will be a strong market for canola meal in Europe as well because of a shortage of feedgrains.
So with increased export sales to Europe and China and another good year shaping up for the domestic crush, canola’s supply and demand outlook is improving.
“It might be a year where we have bigger production and it’s easy to find a home,” said Townsend.