November canola futures broke above technical resistance as July came to an end, supported by strong vegetable oil markets, strong sales of United States new crop soybeans and continuing crusher and exporters demand for canola.
It would be good to see the contract hit that nice round $500 a tonne mark, a level not reached in a nearby contract since the autumn of 2018.
Prairie crop conditions going into the recent hot spell were generally good and if August weather co-operates there is potential for good yields that could put downward pressure on harvest time prices.
But strong vegetable oil values are providing strong support to the oilseed complex.
I talked about the reasons for the rally in palm oil in last week’s column.
Soy oil is also on a roll. In July, the nearby soy oil futures contract climbed more than five percent even as soybeans slipped slightly.
The soy oil rally helped lift November canola by about three percent in the month, a good rise considering the Canadian dollar also climbed by about a penny to flirt with US75 cents.
To get an idea of international canola oil values we can look at the Rotterdam price, that at the end of July was US$935 per tonne, up from its low this year of about $715 set near the end of March. The current value represents a full recovery from the selloff sparked by the COVID-19 pandemic.
But that price has nothing on the soaring canola oil value in China, which recently was trading at more than US$1,200 per tonne on the Zhengzhou Commodity Exchange.
Reuters reported on July 21 that the premium of canola oil over other vegetable oilseeds was the widest in years — since 2012 in the case of soy oil and since 2013 in the case of palm oil.
It is no surprise that canola oil premiums are high there given China’s restrictions on imports of seed from Canada.
And importers there are also aware of the tensions between Beijing and Australia that are already blocking barley trade and could expand to other crops.
As I looked at China’s canola oil rally, I also wondered whether the heavy rain this summer in central and southern China would have hurt its domestic rapeseed production, which is located in central regions.
The rain and flooding has been so heavy that there was speculation in news reports in media outside China that the giant Three Gorges Dam on the Yangtze River could be overwhelmed, which would spark a catastrophe.
There were reports that the massive build-up of water behind the dam had caused a small deflection in the dam, but authorities were quick to discount these allegations as irresponsible, unscientific and with “ulterior motives.”
The rainy season is now coming to an end and problems from excess water are expected to ease.
At any rate, the rain and flooding didn’t affect the winter rapeseed harvest that wrapped up in May. Also spring corn and soybean crops are grown in northeastern China, far away from the flooding. Indeed parts of China’s northeast have been a bit dry.
The U.S. agricultural attaché in China issued an oilseeds and products update on June 30. It said domestic rapeseed production was estimated at 13.5 million tonnes, up 2.6 percent from the year before and quality was good.
But consumption always outpaces domestic production, leading to the imports that traditionally have been so beneficial to Canadian growers.
Crushers in the United Arab Emirates have capitalized on the situation by increasing seed purchases from Canada, crushing it and selling the oil and meal to China.
Canadian crushers have also been able to marginally increase product sales to China, with crude oil exports to the country in the January-to-May period up 7.6 percent over the same period last year to 444,490 tonnes.
The attaché expects Chinese crushers will also process more soybeans to help fill the vegetable oil void.
Looking beyond the China situation, canola is supported by another disappointing crop in the European Union, which is expected to roughly match last year’s 17 million tonnes.
Ukraine also had a poor crop, with estimates ranging from 2.52 million tonnes to 3.07 million, down from 3.35 million last year.
Brazil has already sold much of its soybean harvest and farmers are now hanging on to the last portion in hopes of a rally if U.S. soybeans run into trouble in the reproductive stage in August.
That might be wishful thinking. The July 26 U.S. Department of Agriculture weekly crop condition report showed soybeans in great shape with 72 percent rated good to excellent, up from 54 percent last year and the 10-year average of 62 percent.
At the end of July, the longer term forecasts for the first half of August did not show intense heat that would hurt soybean yields.
While the good crop prospects weigh on soybean futures, the negative effect is mostly offset by the strong pace of American crop export sales, which are picking up as Brazil’s shipping season winds down.
Export sales in July of U.S. soybeans and corn easily reached record highs thanks partly to big China buying.
Through July 23, sales of soybeans for delivery in 2020-21 totalled about 8.1 million tonnes, the most for that point in the marketing year since 2014.
Luckily so far, the fallout from latest tensions between Washington and Beijing has been limited to tit-for-tat consulate closures, not a renewed tariff battle.