Unexpectedly strong demand out of China will reduce what was going to be a huge canola carryover. But a major exporter of the crop believes growers shouldn’t get overly excited.
China’s government has committed to buy 1.5 million tonnes of domestically grown rapeseed for its reserve stocks by the end of this marketing year as it tries to boost domestic oilseed production and minimize food price inflation.
“They are taking available seed off the market and that is being replaced with Canadian canola seed,” said Shaun Wildman, canola trader with Viterra Inc.
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With that government intervention, Wildman expects China will import more than two million tonnes of Canadian canola in 2008-09.
Sales have already been brisk. The Canadian Grain Commission reports canola exports this crop year to Feb. 8 total 3.74 million tonnes, up almost 25 percent over last year at the same time.
The recent ramping up of shipments to China will go a long way toward reducing what was expected to be a burdensome supply of the crop.
As of Jan. 26, Agriculture Canada was forecasting three million tonnes of canola carryout.
“I’d probably call the carryout today about 2.3 million tonnes,” he said.
Other trade estimates range from 1.9 to 2.5 million tonnes. Wildman’s figure represents more than 60 days of supply, or a 20 percent stocks-to-use ratio.
“It’s friendlier than it was previously but it’s not super bullish,” he said.
There would have to be substantial positive factors besides the dryness in Argentina’s soybean region and government buying in China to bump canola prices above $10 per bushel.
“I think the odds are stacked against that,” said Wildman.
Canadian farmers need to understand the recent surge in exports to China is a tenuous situation based on unpredictable government buying habits.
When the Chinese government leaves the market, exporters will have to start looking to alternative buyers like the biodiesel market, which Wildman described as terrible.
“It reminds me of India and their government-assisted buying last year. When India stepped out of the market, peas went from $10 per bu. to $6 per bu.,” he said.
Another uncertainty is that vegetable oil demand has slowed in key markets. Wildman just returned from a trip to Mexico, where vegetable oil demand has fallen five to 10 percent. He said it’s a similar story in the United States and Japan. Slumping sales are largely due to the big oilseed price rally this summer that rationed demand and the overall slowdown in the global economy.
Compounding the problem for canola is that it has lost ground to cheaper palm oil during the hike in vegetable oil prices.
“It’s not all roses in the canola market because of China.”
Agriculture Canada forecasts 16.8 million acres of canola in 2009, a four percent increase over last year’s crop. Wildman thinks that is achievable given good spring moisture.
Canola will compete for acreage with wheat, which is expected to have its own ample carryover of 5.4 million tonnes or a 25 percent stocks-to-use ratio, according to Agriculture Canada’s latest supply and demand estimate.
That said, No. 1 red spring wheat values are expected to be around $6.50 per bu., which will be competitive with canola.
Wildman said the global canola supply and demand outlook can move canola prices a maximum of plus or minus $2 per bu. against soybean values.
He expects China to remain an important customer of Canadian canola for the foreseeable future as long as it remains cheap relative to soybeans.
