Producers shouldn’t despair over the falling price of canola.
It’s probably just a short-term phenomenon and the medium-term price outlook is quite rosy.
“What we’re into right now is a bit of harvest pressure,” said David Reimann, a Winnipeg Commodity Exchange floor trader with Benson Quinn GMS.
“The market is anticipating this stuff coming off and we’re seeing good (harvest) progress. That is weighing on the market. In the next month we’ll see more (pressure) until the crop is in the bin.”
Canola staged an impressive rally during the summer, reaching $371.50 for the November contract on Aug. 13. During the week that Reimann spoke on Aug. 29, it slid below $340.
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The deputy chief economist of Farm Credit Canada says 92 per cent of Canada’s total exports to the U.S. went into the country duty-free in June.
“It’s hard to make a rally with fresh pipeline supplies hitting the system,” he said.
But most analysts see good chances for a price recovery after harvest.
“WCE canola prices have taken a bit of a beating lately, but we are still (expecting) friendly prices in the medium term,” said Statcom’s Aug. 28 Weekly International Canola-Rapeseed Report.
Reimann said $370 is possible after harvest, but there’s greater chance of a price hike during the winter. The oil complex will place a cap on canola prices, so whatever happens to the U.S. soybean crop before it is in the bin will affect future prices.
The U.S. market has already assumed a big crop, so if anything lowers estimates it could help propel an oil rally.
Where it might go is anybody’s guess.
“We can take a run at $400, but it might go to $500 or stop at $380.”
Canadian canola is in tight supply this year. Production will probably slump to about five million tonnes from more than seven million last year, Statistics Canada estimated on Aug. 28 based on a late July survey.
Since the survey, crop conditions have deteriorated and most analysts expect the crop to be smaller than five million tonnes.
Because of the small crop, the market will ration demand, giving canola a boost from other oil supplies. That means prices will rise and low bidders will be pushed into competing oil supplies. The good side of this is that canola sellers will be able to sell to high bidders at premium prices. That will earn farmers more per tonne than they would if there was an average crop.
But there’s a long-term downside to a small, high-priced crop.
Dale Adolphe, president of the Canola Council of Canada, said forcing regular or prospective buyers to look at other oils or other canola suppliers will hurt sellers in future years.
“There’s nothing positive about this,” said Adolphe.
“What this does is allows the competition to move in and then we have to try to get moved back in afterwards.”
Adolphe said the U.S. canola crop is larger than average and U.S. sellers will be targeting the Mexican market, which Canada had developed.
China, which many hoped would become a regular buyer of Canadian canola, will probably be put off by this year’s prices.
“We didn’t know if China was going to become a consistent buyer, but we know this year that we can’t be a consistent seller to them,” Adolphe said.
Most of the recent slump in canola prices is due to improving conditions in U.S. soybean fields. But some is also due to commodity speculators selling and taking profits, Reimann said.
“They were major buyers on the way up, but they’ve sold out of most of their positions now.”
Reimann said this year demonstrates how speculators can get farmers higher prices. By buying aggressively earlier in the season, they forced other buyers to raise their bids.
“Speculators aren’t always bad. They’ve helped out the farmer considerably with prices. They’ve done a lot of good for the market this year.”
But for the present, the price outlook is good for farmers who have a crop to sell.
“It’s not runaway bullish, but there’s a much more optimistic tone.”
