BOCA RATON, Fla. – Canola growers have been riding a price roller-coaster but the future should be uplifting, says the president of a leading market analysis firm.
“We believe we’re probably not going to go down much further than here,” said Tom Scott, president of Informa Economics Inc.
Canola futures prices that peaked above $774 per tonne a few weeks ago have fallen below $600 by March 17 largely because “fund froth” had taken the commodity well beyond where it should have been.
Scott said it is nearly impossible to pick a point where a commodity will bottom out, but when he looks at the underlying fundamentals for canola, it is hard to imagine prices will spiral down much longer.
Read Also
USDA’s August corn yield estimates are bearish
The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
You can’t figure out where canola is heading without having good hard look at U.S. soybean supply and demand.
Informa has crunched the soybean numbers and estimates a 2008-09 carryout of 78 million bushels, 28 percent smaller than what will likely be left after this year’s marketing campaign ends.
“I’m here to tell you it can’t happen. You can’t have soybean stocks that low. Something has got to give,” said Scott.
Either demand will be rationed, which the market seems reluctant to do, or more acreage will have to be purchased by soybean buyers through higher prices come spring. The latter is the more likely scenario.
“The market is looking forward 18 to 24 months and it doesn’t like what it sees in terms of the supply,” he said.
Informa forecasts an average futures price of $13.60 US per bu. for the coming crop year, up from $13.10 in 2007-08 and an average farm price of $12.75 per bu., up from $10.65.
It’s a more optimistic soybean price outlook than other analysts have delivered. Canola and rapeseed should follow in lockstep.
“You’re not going to get one of them too far out of whack with the other,” he said.
Jim Caughlin, director of the Saskatchewan Canola Development Commission, concurred with Scott’s assessment of the market.
“I think we’ve got another year, year-and-a-half, where we’ve got some pretty strong prices going forward.”
He said there’s always a concern that prices could tail off down the road but he hopes it stays in the $400 to $500 per tonne range in the long term rather than around $300, where it languished for years before the run-up that started in 2006.
If prices find a home in that upper range, it would put $10 Cdn per bu. in farmers’ pockets.
“That gets away from this $5 thing that just doesn’t pay the bills in Western Canada,” said Caughlin.
Scott said canola isn’t going back to that $300 to $400 per tonne level because demand for the crop is simply too strong.
But he believes the growth rate for vegetable oil and meal demand will taper off.
World vegetable oil use has expanded at six percent a year over the past five years. Informa predicts that will slow to four percent a year over the next eight years as biodiesel producers meet their national mandates. Protein meal use is also expected to moderate.
However, canola has a built-in advantage over its competition in this oil-driven market because it contains 42 percent oil versus 18 percent for soybean.
Scott did a rough calculation to show how this would play in canola’s favour when it comes to filling the demand for oil free of trans fat.
He estimated the current market for partially hydrogenated soybean oil is 1.7 million tonnes. If half of that market went to high oleic canola, it would require an additional 2.6 million acres of the crop. If the other half went to low linolenic soybeans it would require 6.8 million acres.
In an acreage-constrained world that is a big difference.
“I think you’re going to tend to gravitate towards the oilseed that has the higher oil content because it is requiring fewer acres,” said Scott.
