I’m predicting a dour mood this week in Montreal, as canola growers and those who live off their crop production efforts gather for the Canola Council of Canada annual convention.
Problems have piled up for what’s become most farmers’ favourite crop. The spread of clubroot and the worsening of blackleg have thrown a pall into the plans of many who hoped to be able to keep following a two-year canola rotation, giving them at least one profitable crop every two years.
The chart here is worse news. The price plunge is a terrible sight in the weeks before seeding. Now is when a lot of farmers do their new crop pricing, and all of a sudden both old crop and new crop prices look terrible. This winter, $500 seemed to be what the market wanted to offer, and a lot of guys got comfortable with that. Now $460 is sitting there, sneering.
There could be a bounce. One broker I spoke with March 4 said he had been snapping up $460 call options at a cheap premium. If canola futures rebound to $470 or $480 that’s healthy compensation for the recent slump.
He had also previously bought a lot of puts for farmers at around $500, as had another I spoke with.
But most farmers have not priced much, if any, of their new crop canola, so this selloff is going to take a lot of joy out of the coming crop season.
Most traders and analysts are attributing this present weakness to China, which many believe is suffocating Chinese demand for Canadian canola as part of its tantrum and bullying against Canada because of the Huawei mess.
Many had hoped that China, already restricting imports of United States soybeans, would restrict its acting-out against Canada to political and symbolic targets and leave canola alone.
But belief has grown throughout the grain industry that the Chinese government has managed to strangle the flow of Canadian canola to China.
That opened up a vacuum of demand underneath the sticky $500 level, and when market players with long positions finally recognized the vacuum and stopped believing that greater fools would come along to assume those positions at higher prices, they bailed, and the market collapsed into the void.
This is bad short-term, with farmers heading into spring with poor prospects before them, and many with bins full of canola that aren’t moving.
It’s bad medium-term, with next winter looking pretty grim if prices don’t recover. With heavy stocks and continuing Chinese belligerence, there’s little reason to think prices have to move much higher.
And if the China problem isn’t resolved, this could be a long-term drag on the canola industry and its lofty goals. If we can move production toward 26 million tonnes and an average of 52 bushels per acre by 2025, the CCC’s goal, we’re going to need to be able to move a lot more.
The reliance on the Chinese market is a strategic danger for the industry. That’s what’s being highlighted by the present Canada-China crisis.
How seriously does that endanger the canola council’s lofty production goals? That’s something I’ll be chatting about with people in Montreal this week.
One thing is clear: canola isn’t offering farmers the automatic profitability it has for a decade. How much that challenges farmers’ willingness to embrace the CCC’s mega-acreage and mega-production goals is now an open question.
But if predictable profitability doesn’t return quickly, the silver lining here is that the one-in-two canola rotation might stop seeming so attractive and those gambling with it today might return to a less risky production system.