Future of canola rally comes with questions

Rally supported by soy oil prices that have rebounded to highs set earlier in 2020, but it’s unclear how long that will last

Mike Jubinville thinks the top is yet to come in the canola market but farmers should sell some of their production at today’s prices.

Some analysts are suggesting that the canola fall rally is over.

“I’m not necessarily convinced of that,” he said during a virtual presentation at the Farm Forum Event.

“Is this the ultimate top? My suspicion is probably not.”

Grain markets appear to have moved from a supply/push environment to a once-in-a-decade demand/pull environment.

And the demand for canola is strong with no slowdown in domestic crush or exports early in the crop year.

Canola is supported by strong soybean oil prices that have rebounded to the COVID-19 highs set in early 2020.

China is the world’s biggest consumer of vegetable oil and its rapeseed oil prices continue to climb higher, suggesting a shortage of the commodity.

Cash basis levels have deteriorated a bit but farmer deliveries of canola are starting to slow, which should counteract the weakening basis.

Futures spreads continue to be extremely narrow and there have even been recent cases where the nearby futures are higher than the deferred prices.

“That’s usually a bullish thing. That’s an indicator that commercial demand is pretty aggressive in the marketplace,” said Jubinville.

Things are looking pretty tight on the supply side. Earlier this summer analysts were forecasting as much as 21 million tonnes of production. Statistics Canada’s latest estimate is 19.4 million tonnes.

Jubinville is at 18.75 million tonnes and believes if anything it will end up smaller than that.

Ending stocks for 2020-21 could be around 1.5 million tonnes, resulting in a tight seven to eight percent stocks-to-use ratio.

He believes grain companies will have to start curtailing exports later in the marketing campaign.

Despite his expectation that the market high is yet to come, Jubinville advises farmers to make incremental sales into the rising market because they are locking in pure profit.

That is far more preferable than trying to anticipate the peak and then chasing the market on the way down.

Jubinville is not as bullish about the wheat market as he is oilseeds. He wouldn’t characterize the stocks held by key exporting countries as tight.

However, prices have been moving higher in importing nations like Egypt due to stockpiling. Wheat is also propped up by strong corn prices.

One anomaly in the wheat market is that high protein wheat isn’t fetching much of a premium in the market.

In a recent sale, South Korea bought United States hard red spring wheat (HRSW) with 14 percent protein at a 37 cent discount to U.S. hard red winter wheat with 11.5 percent protein.

“It suggests to me spring wheat still looks undervalued,” he said.

Jubinville noted that the U.S. is having difficulty exporting HRSW because the handling system is plugged with soybeans heading to China.

That should result in strong Canadian HRSW demand until the Australian crop is harvested.

There have been recent bids of up to $7 per bu. for milling wheat for deferred delivery in southern Alberta. In Jubinville’s 30 years of experience in the business, it is never a bad idea to sell wheat at that price.

Canadian farmers harvested 4.3 million tonnes of peas, so there is a big crop to move. Luckily China has “stepped up to the plate” and has been an aggressive early-season buyer.

He is forecasting 200,000 tonnes of carryout, which would be “really tight.”

Cash bids for yellow peas in Saskatchewan were $8.75 per bu. for deferred delivery last week.

“Those opportunities to me are looking good,” said Jubinville.

Peas are getting support from soybean meal prices that have crested at US$400 per tonne due to the ongoing expansion of China’s hog herd.

Pea prices will stay strong as long as soymeal and corn prices continue to rise because much of the current demand from China is for feed peas.

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