Canola prices are being crushed under Canada’s overweight Cinderella crop.
The market may end up staggering under a 10-million-tonne canola crop that leaves a three-million-tonne hangover to spoil next year’s market.
Canola prices are low and analysts believe there is room for them to fall farther.
“I think StatsCan put the nail in the coffin,” said Ag Commodity Research canola analyst Nolita Clyde about the Dec. 7 Statistics Canada crop production report.
“Clearly, we have to go lower.”
The report pegged total Canadian canola production at 9.66 million tonnes, with a cross-prairie average of 32.6 bushels per acre. Saskatchewan’s production rose a whopping 60 percent and Alberta’s rose 25 percent, but Manitoba production plunged 29 percent.
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Clyde said Statistics Canada tends to underestimate the crop size, so 9.7 million tonnes may actually be 10 million tonnes.
Farmers have been stunned by the weakness in canola prices, which goes well beyond what most market analysts were forecasting. Many predicted that after the typical harvest slump, futures prices would improve.
Normally, prices gradually increase over the winter, often followed by a spring rally.
But this year the harvest slide has continued into the main marketing season, with the ever-growing canola estimate providing the rationale.
“It seems like a pretty shocking number,” said Union Securities broker Ken Ball about the 9.7 million tonne estimate. “Everybody was pretty dumbfounded.”
Traders had predicted that the crop would be 8.6-9.2 million tonnes.
“We all guessed there was going to be a nine in front of it,” said Ball.
“But 9.7? A lot of people just did not believe we had a crop that big.”
Ball said the supply and demand math for canola is bad through the winter and into next crop year. A carryover of 1-1.5 million tonnes would generally drag prices down, but a three million tonne carryover could drag prices into the bargain basement.
The Statistics Canada report was followed by a $12-$13 per tonne drop in futures prices by Dec. 9, but some of that was also due to the Canadian dollar strengthening. While prices might be near their bottom, a further $5-$15 per tonne drop may be coming, as the market drops to a level at which the huge stocks will be cheap enough to attract new demand in a glutted world market.
“I have an inkling we may go down to some rather disturbing prices,” said Ball. At true bargain prices, canola may spark demand in unusual areas, such as for fuel.
“When a tonne of heating oil costs $600 a tonne on the Prairies, and canola can be bought for $210 to $215 or $220 a tonne, it might be a viable fuel source,” said Ball about this worst case scenario.
Ball said such a price collapse would likely be short term, but some farmers may be forced to sell at the worst time, which he said would be a tragedy.
Analysts see little reason for price optimism through the winter.
“Every single factor you could write down on a piece of paper that influences the price of canola is all going the wrong way,” said Ball.
Wild Oats Grain Market Advisory analyst John Duvenaud said the big U.S. soybean crop will also weigh on the market.
The United States Department of Agriculture’s December supply and demand report released Dec. 9 found soybean supplies in major exporting nations to be more than what many expected, and said exports of American soybeans over the rest of the 2005-06 crop year would be less than previously forecast.
The report left Brazilian soybean production projections unchanged, even though many Brazilian reports suggest acreage there has been cut, inputs have been reduced and some Asian rust infections have been left untreated.
Duvenaud expects American farmers will seed another big soybean crop in 2006-07.
“Next summer it’s going to be fence row to fence row soybeans because of the cost of nitrogen,” said Duvenaud.
Clyde said farmers’ hopes for the usual spring price rally may be misplaced this year. Often canola buyers bid up canola prices in the spring to encourage farmers busy with seeding to take time to deliver. They also want to ensure enough canola acres are seeded.
With a gigantic canola carryover likely, “the pressure will be for prices to go lower, not higher,” she said.
