Canola futures rallied in December, climbing to the upper level of the price range in place since the end of summer, but still lower than what they were at the same time last year and arguably disappointing considering the sharp rally in soybean oil.
From the beginning of December to Jan. 3, March soy oil rallied 13 percent, March soybeans rallied about eight percent while March canola rallied a little less than five percent.
Soybean oil futures are the highest since the fall of 2017, but canola would need to rally another 10 percent higher to reach a similar level.
Part of canola’s lagging behaviour can be explained by the rally in the Canadian dollar, to near 77 cents US from around 75 cents at the start of December.
But even if the loonie had held steady, canola would be well behind the strong rally in soy oil and would have even trailed the soybean rally.
Several questions come to mind, including why are oilseeds and especially vegetable oil rallying, will they rally further and will canola catch up with soy oil?
Chicago soybean futures are rallying on hopes China and the United States will sign on Jan. 15 what the White House has described as a first phase trade agreement that would include China’s commitment to buy more American agricultural products, including soybeans.
In a goodwill gesture, China issued waivers on its soybean import tariffs in November and December allowing the tap to partially reopen on American soy imports, but the jury is still out on whether China’s buying in 2020 will live up to the hugely optimistic promises made by president Donald Trump and his trade representative Robert Lighthizer.
Soybean traders are also starting to note a dry weather trend in northeastern and southern Brazil that has the potential to trim yields if rain does not arrive soon. However, weather has been beneficial in central growing regions and for now forecasts call for a record large soybean crop in Brazil of 123 million tonnes.
The most exciting development however is in global vegetable oil stocks, which are shrinking as production fails to keep up with demand. The focus is especially on palm oil where the trend of annual production increases has slowed to a crawl due to dry weather, hazy smoke-filled skies and reduced fertilizer use. But demand is climbing, especially from new biodiesel requirements in Indonesia, the world’s largest palm oil producer and exporter.
Indonesia is increasing its palm oil content in biodiesel to 30 percent in a move to reduce the billions it spends on imported oil and to support its critical domestic palm industry.
The momentum for palm oil increased last week when India slashed its import taxes on palm oil, a move expected to increase demand for the product.
I last reported on palm oil in October, noting that analysts expected a 15 to 20 percent rally in palm prices into the second quarter of 2020, but the market reacted much more quickly than expected and has already exceeded the price projections made in autumn.
Palm oil normally has a strong discount to soy oil but palm has rallied so strongly in the last two months that it has wiped out most of its price advantage. Soy oil and other vegetable oils are now much more competitive and should see stronger demand.
The palm oil shortage could continue at least until the summer of this year.
The global vegetable oil situation is real and unaffected by politics whereas the U.S.-China trade situation is still uncertain.
Even if a phase one deal is signed it is hard to say how it will affect the global trade in soybeans.
African swine fever has slashed the size of China’s hog herd and it is spreading to other Asian countries. With fewer hogs to feed the demand for soybeans and soy meal simply is not as large as it was two years ago. Global soybean consumption fell by eight million tonnes or about five percent last year and is expected to recover only slightly this crop year.
The U.S.-China trade war allowed Brazil to gain market share in China. If the U.S. regains its place in China, Brazil will simply go back to serving markets it had before the Chinese windfall.
Ultimately, will these trade developments cause a major, long-lasting impact on soybean and oilseed markets? It is hard to say.
The recent bullishness in the oilseed complex has helped March canola recover about $20 from the late November lows near $460 per tonne but as I’ve noted the gains seem muted compared to soy oil.
Technical chart signals show that canola and soy oil are under-priced, signalling a buying opportunity for traders.
Canola suffers from its own trade problems with China and that probably is the main reason for the modest nature of the price rally so far.
Exports to Dec. 15 are 3.43 million tonnes, about seven percent or 252,300 tonnes behind last year’s pace.
That lag in movement is concerning considering that Agriculture Canada’s supply and demand forecast for the full crop year expects exports to be almost level with last year at 9.1 million tonnes.
However, excellent crush profit margins have domestic processors running full out. Domestic disappearance to Dec. 15 is up an amazing one million tonnes over last year at 4.21 million tonnes, according to Canadian Grain Commission figures.
Agriculture Canada forecasts conservatively that domestic demand will be only 500,000 tonnes ahead of last year.
After assessing all supply and demand assumptions, Agriculture Canada forecasts end of year carryout at a burdensome 3.5 million tonnes.
However, we can hope that the domestic processing industry will continue to outperform for the next seven months of the crop year and offset the weakness in export sales. Given the tight global supply of vegetable oil this hope has a strong foundation.
The carryout might yet fall to 300,000 tonnes or less.
I’ll end this by saying I think there is fundamental support for a further rally in canola prices but for the rally to go as high as soybean oil, I think will require some better news on the export front.