Pricey canola squeezes crush margins, lowers production

Slow crushing pace could jeopardize Agriculture Canada’s crush forecast of 9.49 million tonnes this year

Canola crush margins have been in the doldrums, but they are starting to improve, says a futures trader.

Ken Ball, futures adviser with PI Financial Corp., has his own version of a crush margin index, which compares the value of canola seed to that of oil and meal.

The index was in the $100 to $120 per tonne range at the beginning of 2018, but recently it bottomed out at $44 per tonne, which is as low as it has been over the past 15 years.

However, in the last couple of weeks the index has rebounded to $65 to $70 per tonne, which is better but well below the long-term average of $100 per tonne.

“We’re still pretty low but it is improving,” said Ball.

Crush margins have been languishing in the low end of the range because canola seed is pricey relative to oil and meal.

“Canola has managed to stay very expensive right through the last number of months,” he said.

Canola prices have been propped up by a core group of large-scale futures traders that have been heavily long canola and short soybeans.

They have been bearish soybeans because of the trade spat between the United States and China and bullish canola because of Canada’s weather woes and extraordinarily late harvest.

“They’ve been pushing that spread pretty hard, and I think that’s a big reason canola has been able to stay, relatively speaking, so high,” said Ball.

But now it appears likely that Canadian farmers will harvest the vast majority of the canola they planted, and the speculators are less bullish canola, making the crop more affordable.

The 2018-19 canola crush program started out at a good pace with 742,988 tonnes crushed in August, up 18 percent over last year. That was because of a large carryout from the 2017-18 crop.

However, the pace of crush slowed considerably in September to 698,377 tonnes, seven percent lower than the previous September. October’s numbers are likely to be down as well because of the dismal crush margins.

Agriculture Canada is forecasting a similar crush program as last year at 9.49 million tonnes. Ball wonders if that number will be achievable because of the disappointing margins.

“In other years when crush margins have fallen off a bit, the crushers have had ample time with the futures market to lock in some good margins,” he said.

“They haven’t had that this year. The margins have been poor for so long.”

Canola exports have also been sluggish. Shipments through August 2018 are slightly more than one million tonnes below the same period in 2018.

“We may need to generate better demand for canola than we’re seeing right now,” said Ball.

However, that all hinges on the size of the 2018-19 crop. Statistics Canada pegged it at 21 million tonnes.

He said if that is the case, there will likely be a surplus of the oilseed, and prices will need to fall. If it comes in at 20 million tonnes the market will be fairly balanced. A 19 million tonne crop would be tight.

Statistics Canada’s next production estimate is on Dec. 6.

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