Canola market fundamentals look promising but don’t expect a big price response, says an analyst.
Production problems in key exporting and consuming regions have created a bullish picture for the crop.
The Australian Oilseeds Federation expects a 2.96 million tonne crop.
That is better than what many forecasters expected. The country got timely rains to thwart the dry conditions brought on by El Nino. But it will be the smallest crop in four years, continuing a steady downward trend over that time. The oil content is also below average.
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Glen Pownall, managing director of Peter Cremer Canada, expects Australia to have a strong export program but it will all be going in one direction.
“All of their canola for all intents and purposes should go to Europe,” he said.
That is because farmers in the European Union had a disastrous year. They produced 21.5 million tonnes of canola, down from 24.1 million tonnes a year ago. Dry weather reduced yields, particularly in France.
That means Australia won’t have enough excess canola to compete with Canada in the Chinese marketplace.
“They were never a huge force by any means to compete against but this year I don’t see them supplying that market at all,” said Pownall.
“Canada will do that 100 percent this year.”
Chinese demand is strong despite crush margins that have fluctuated to slightly positive from negative at times.
Fund selling has lowered canola futures enough to spark trade into China the past few weeks.
“From the beginning of this crop year through January, I see the export program to China actually being pretty good and much better than I anticipated,” he said.
Crushers are well covered through January but Pownall anticipates China will end up taking four million tonnes of Canadian canola in 2015-16, which would be the same amount as the previous year.
The International Grains Council estimates China is sitting on a stockpile of six million tonnes of rapeseed oil.
If some of that oil hits the market, it could temper crusher demand for Canadian canola.
Pownall believes that is unlikely because rapeseed oil prices are well below what the Chinese government paid for its supplies and it does not want a loss on the books.
Demand is expected to remain strong through 2016 due to reduced Chinese rapeseed production.
China’s rapeseed subsidy program has been transformed to a patchwork of less lucrative provincial programs from a national program.
“Because they have essentially removed the support price and put it at such lower levels year-over-year, I think acres are going to be down 20 percent,” he said.
Chinese corn support is also down but not wheat.
“What they are doing is maintaining the support program on wheat, so I think the Chinese farmer is going to increase his wheat acreage substantially,” said Pownall.
It is a mixed bag for winter rapeseed crops in other countries. The IGC estimates planting in the EU at 16 million acres, which is the same as last year but lower than previous years.
Fall conditions were generally favourable.
That is not the case in Ukraine, which is the world’s third largest canola/rapeseed exporter behind Canada and Australia.
One-third of the country’s rapeseed crop was rated in poor shape as of Nov. 12, worse than the 19 percent last year and the five-year average of 15 percent.
“Most plants were expected to enter winter in an underdeveloped condition with up to 15 percent of the area seen failing to emerge due to dryness,” according to the IGC report.
Ukraine farmers seeded 1.6 million acres to winter canola, down 36 percent from the previous five-year average.
“Total production is tentatively projected at a nine-year low of less than 1.3 million tonnes,” reported the IGC.
Despite the bullish canola fundamentals around the world, Pownall does not expect stronger canola prices due to the glut of soybean oil on the market.
