There is a mounting belief that canola carryout is going to become burdensome in 2008-09, weighing down prices and reducing next spring’s acreage.
Even factoring in record crush and export programs, industry leaders are bearish about where supplies are heading.
James Rea, director of bulk product sales with Canbra Foods Ltd., doesn’t buy Statistics Canada’s latest estimate of a 10.4 million tonne crop. He thinks it will be closer to 11 million tonnes. With last year’s carryout, total supply will be in the 12.2 to 12.5 million tonne range.
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He expects Canadian crushers will chew through a record 4.5 million tonnes of the crop in 2008-09 and that the export program could be a record 5.5 million tonnes given the strong demand dynamics that are in the market today.
“That still leaves carryout in the order of two to 2.5 million tonnes to be dealt with. That is burdensome,” said Rea.
Other analysts are more pessimistic. The United States Department of Agriculture is forecasting a 650,000 tonne decline in Canadian canola exports in 2008-09, largely because of slumping demand from China.
That would create what Rea called an ultra-burdensome carryout in excess of three million tonnes. But the market will do everything to avoid that scenario, which could mean reduced prices in 2008-09 and smaller plantings in 2009-10.
Brant Randles, president of Louis Dreyfus Canada Ltd., has penciled in a 2008-09 carryout of 1.5 million tonnes but that is using a “very conservative” production figure of 10 million tonnes.
He now expects the crop to be closer to 10.5 million tonnes and would not dismiss notions of 11 million, which means a much bigger carryout.
“I think the market has further downside because we have to find more demand,” said Randles.
Bob Broeska, president of the Canadian Oilseed Processors Association, said an 11 million tonne crop would indeed be troubling.
“If that was the case it could bring some pricing pressure, especially if we see palm oil starting to flex its muscles and I just got to believe that we are.”
Indonesia has become a “powerhouse” of palm production, which could put downward pressure on the entire vegetable oil complex.
“Nobody realizes how big a resource that really is. In a few short years they’ve come from nowhere to equal the production of Malaysia and their resource base is barely tapped yet.”
The good news about the influx of palm oil is that it could drive soy oil prices down to the point where the product finds its way back into biodiesel plants and that will, in turn, create a void in U.S. food markets that can be filled by canola, said Broeska.
Rea said North American demand for transfat-free specialty canola oil is staggering, but the supply of the commodity is too small and the price too high to fully exploit that market.
Part of the problem is specialty canola varieties still suffer from a yield drag compared to conventional canola. There are also extra costs associated with identity preservation.
Rea estimates specialty canola makes up 12 percent of today’s canola acreage. Once the agronomic obstacles are overcome he could easily see specialty canola oil supplying one-third of North America’s 4.1 million tonne market for partially hydrogenated soybean oil.
To put it in perspective, servicing that market would require 80 percent of Canada’s 2007-08 record canola crush.
So the future looks bright for Canadian crushers. And so does the present. Crushers consumed a record 4.14 million tonnes of canola in 2007-08, up 16 percent from last year.
“With current market actions and the crop in front of us, we should be able to see canola crush in Canada move to the 4.5 to 4.6 million tonne range,” said Rea.
Broeska said that number is feasible, despite some anticipated delays in the opening of new crushing facilities.
“A month or two ago I would have said we’d start to see crush ramp up in that first half of the year. I do not now believe they will ramp up until the second half of the year.”
