Uncertainty hangs over otherwise stable canola market

For most of the last three years, the canola market has been steady.

Canola futures have traded in a range of $450 to $550 per tonne and since 2017 the trading range has narrowed as prices have stayed between $475 to $530 per tonne.

The sideways trend could continue into 2019. Or, given the recent volatility in financial markets, the stable canola market could become more unpredictable.

“With stock markets getting a bit wobbly and concerns about recession here … the global economic (conditions) and wider financial market, that adds some uncertainty,” said Jon Driedger, senior market analyst with FarmLink Market Solutions.

“Those are two big umbrella things that we have in the back of our minds, (which) haven’t been as big of a factor until recently.”

That uncertainty was on full display in December, which was a wild month for stock markets.

On Dec. 26, the S&P 500 jumped 4.98 percent, its biggest daily gain since March of 2009, according to CNBC.

In the previous week, from Dec. 17-21, the S&P lost seven percent of its value.

The Chicago Board Options Exchange (CBOE) has a volatility index (VIX) that reflects such wild swings in the market. For all of 2017 and about five months of 2018, the VIX traded between 10 to 15.

On Dec. 17 the VIX topped 30, which was its highest level since 2011.

If the VIX remains high in 2019, the volatility could spill over into agricultural commodity markets. Plus, there’s the additional factor of the U.S.-China trade war and the ongoing pressure on soybean prices.

“The outlook for soybeans, I think, is challenging,” said Driedger, who lives near Grunthal, Man. “Even if the China and the U.S. make nice, I don’t think there’s any way you’re going to see (the) U.S. soybean carryout get drawn down … to a level that’s price supportive.”

If he’s correct, large stocks of soybeans could persist for months, dragging down prices into the 2019-20 crop year.

“If you look at canola, maybe its biggest headwind is that … there’s a bit of a soybean problem,” Driedger added.

On the positive side of the ledger, core demand for canola seed, oil and meal is not going away. Major markets like Mexico, Japan and China will continue to buy canola.

“Our main export markets are quite sticky,” Driedger said. “(And) our crush capacity, domestically … they’ll still be buying canola.”

That core demand won’t save prices if there is a massive canola crop in 2019, but it does provide stability.

As well, if China and the U.S. do resolve their trade issues and American soybean exports return to normal levels, that scenario would be supportive for canola futures.

“Does that help canola get back to $525 (per tonne), the higher end of the range? Certainly it would,” said David Derwin, portfolio manager and investment adviser with PI Financial in Winnipeg.

Market volatility could persist or get worse in 2019, but at the same time canola prices remained steady in 2018 despite a list of these powerful factors:

  • nasty negotiations over a new NAFTA deal
  • the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership
  • a difficult and delayed harvest in a large part of Western Canada

Considering the recent history of chaos and technical factors in the market, canola futures may remain in a range of $475 to $525 per tonne for much of 2019.

“If (the) trend does continue, one could expect a sideways market again in canola,” Derwin said.

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