Canola prices show surprising strength

Canola cash prices will likely drift higher than $11 per bushel this fall and winter based on current market fundamentals, says an analyst.

Brennan Turner, chief executive officer of FarmLead, said the strength prices are displaying just before harvest is remarkable for this time of year and bodes well for the coming months.

Cash spot values have held up nicely, averaging around $10.50 per bu. across the Prairies as of Aug. 28.

“This happening at harvest time is a very rare occurrence,” he said.

“Seeing the setup of demand driving the price at this time of year when it’s usually supply driving the price is a really positive element.”

Turner believes it establishes the foundation for a cash price of $11 per bushel or more when canola prices typically peak in late October/early November or mid-January/early February.

“The market is starting to recognize the present value is maybe a little bit undervalued relative to what the end use markets pay,” he said.

Agriculture Canada is forecasting 1.83 million tonnes of old crop carryout, which would be below the previous five-year average of 2.46 million tonnes.

That is a far cry from its November estimate of 4.7 million tonnes due to surprisingly robust exports and domestic crush.

Turner thinks the carryout could climb back to around two million tonnes following Statistics Canada’s new production estimate of 19.4 million tonnes, which is well above Agriculture Canada’s best guess of 18.9 million tonnes.

Where prices go from here depends a lot on the upcoming harvest. Last week, he was thinking a $12 cash price was feasible but Statistics Canada’s new production estimate has tempered his enthusiasm.

Keith Ferley, commodity futures specialist with RBC Dominion Securities, is not in the same camp as Turner about the potential for a further rally into the winter months.

“That’s just false hope for farmers,” he said.

He thinks the current rally has a lot more to do with soybean oil fundamentals than canola fundamentals.

“We’ve got bean oil ripping it higher and that has just kind of pulled canola along kicking and screaming,” he said.

“Canola is not the driver, canola is riding the bus.”

The strengthening euro has also made it profitable for the European Union to import and crush Canadian canola, said Ferley.

He acknowledged that it is “abnormal” for canola prices to be holding up so well at this time of the year. Part of the reason for that was a large carryover from the previous crop year that delayed the usual rally.

Another reason is the strong sales program to China.

“The fact that they’re in here buying now doesn’t necessarily mean they’re going to be here come December/January,” said Ferley.

“I’ve been in the business too long and I’ve seen this before when we’ve actually seen highs at harvest and then the market goes down after that.”

A lot is going to depend on Canada’s canola yields and production.

Clint Jurke, agronomy director with the Canola Council of Canada, thinks this year’s production number will be impacted by the flooding in northwestern Saskatchewan and northern Alberta.

He estimates about 15 percent of the canola on his farm near Lloydminster, Sask., has been lost to sloughs that didn’t exist before this year.

The damage is likely worse heading north and west toward Edmonton, the centre of the flooding.

The other big factor is heat damage, which has shaved off some bushels in the southern Prairies.

But the crops look good in the many areas that didn’t have flooding or heat damage.

“Whether it’s an average crop or whether it’s an above-average crop I can’t say at this point in time,” said Jurke.

Statistics Canada said the crop will be slightly below the previous five-year average and well below the average trade estimate of 19.9 million tonnes.

Jurke said sclerotinia has been a problem in wet areas and there are pockets of blackleg and clubroot but disease damage is not outside of the ordinary.

Insects have not been much of a problem with very little spraying for lygus bugs, diamondback moths and bertha armyworm.

Crop development is pretty much on schedule with combining starting in southern regions last week. Jurke is not overly concerned about frost damage this year.

Turner said canola exports have been shockingly good. Agriculture Canada forecasts 10.1 million tonnes for 2019-20, which is 524,000 tonnes higher than its July estimate.

There has been phenomenal demand from markets like the European Union and the United Arab Emirates, while sales to China have surprised some.

COVID-19 might have been one of the biggest old crop market factors as it greatly reduced competition for rail cargo.

Canadian crude oil rail shipments hit an eight-year low in June, averaging 43,000 barrels per day compared to the record of 412,000 barrels per day set in February, Turner noted.

“COVID has actually been a catalyst to stronger canola prices when everyone thought it might be a detractor,” he said.

Statistics Canada estimates a record 10.13 million tonnes of domestic crush, up nine percent year-on-year.

Demand out of the EU is expected to remain strong. The U.S. Department of Agriculture forecasts 16.8 million tonnes of EU rapeseed production, which would be nearly identical to last year’s short crop.

Bloomberg published a story recently calling it a “paltry” crop caused by dryness, reduced planting and insect pressure resulting from a ban on neonicotinoids.

“The shortfall is heralding another year of large imports and comes as the EU’s usual supplier, Ukraine, also suffered from bad weather,” stated the Bloomberg article.

The USDA forecasts 5.7 million tonnes of EU imports in 2020-21, down slightly from the 6.3 million tonnes bought in 2019-20.

It estimates 5.28 million tonnes of rapeseed production in the former Soviet Union, down from 6.33 million tonnes last year. Ukraine’s production is forecast to drop nearly one million tonnes.

The USDA forecasts a contraction in global rapeseed/canola ending stocks to 4.57 million tonnes in 2020-21, about half of what they were two years ago.

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