China and Statistics Canada have given canola a stiff slap to the face, shocking everyone’s assumption that the market would meekly suck up whatever Canadian farmers could produce this year.
“We’re going to have a burdensome carryout next year, which will be a shock to the farmer and probably the industry,” said Errol Anderson of Pro Market.
“Nobody was expecting that.”
That raises the question of how low canola prices can go now, with important support levels recently breached and little reason to think that prices should soon rise.
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“It’s the timing, in terms of the psychology and the momentum,” said Greg Kostal of Kostal Ag Consulting, about the negative impact of the Statistics Canada finding that Canada’s canola stocks are much higher than expected.
“It just feeds the negativity we’ve been concerned about, justifying the lower markets.”
Statistics Canada found that rather than the 1.4 million tonnes of canola analysts generally expected to be in store at the end of July, there is likely to have been 2.3 million. That’s a massive difference because the trade was assuming the industry was operating with razor-thin stockpiles, but now it appears stocks have been comfortable.
And with a big crop coming in most areas, canola stocks should be ample for next year. That is the opposite of what many expected just six weeks ago when the general expectation was for another year of too-tight stocks.
“In mid-July it looked like we were going to have no stocks and buyers would be scrambling, but now we’re talking about a three million tonne carryout,” said Anderson.
After the Statistics Canada number came out, canola futures fell beneath some key support levels and tested the $455 per tonne support level. If that level doesn’t hold in coming weeks some expect canola to bottom well beneath, perhaps at $440.
The negativity that explains the quick drop beneath $470 is easy to sum up: “If last year’s crop could be that much larger, why couldn’t this year’s crop be much bigger than expected too,” said Kostal.
Canola’s fall from favour with investors is occurring simultaneously with general market fear and bearishness coming from China’s economic slowing and financial markets selloff. Not only does that indirectly hit markets and cause investors to sell assets such as canola futures, but China is a massive market for Canadian canola and now many are wondering if China’s hunger for Canadian canola will subside.
Most analysts feel that food demand is stronger than demand for other commodities, so its actual canola consumption probably won’t fall much.
“I’m not sure how much of the troubles we’re seeing are affecting Chinese consumers,” said Brian Voth of Agri-Trend.
“That’s the level where it affects canola.”
But Voth said part of China’s slowing is its decision to intervene less in domestic price supports for farmers, which could reduce China’s canola demand.
“Those are much more likely to have an effect on our agricultural commodities,” said Voth.
Neil Townsend of G3 agreed.
“The way the Chinese government has been altering the way it supports farmers could have an impact,” said Townsend.
But there are few obvious triggers that could cause canola futures to break out of its bear market, other than in short term corrections.
“Is this the low of canola?” pondered Anderson. “Probably not.”
