Slow exports | Transportation issues stymie processors from making big profits crushing canola and shipping oil and meal south
Canola crushers can see spectacular profits on paper right now, but they get a lot weaker as soon as the new U.S. soybean crop is harvested.
That would normally inspire crushers to bid aggressively and run their plants as hard as they can, but it’s not happening.
Some say it is another symptom of the dreadful logistics situation that lasted through the winter and is still having an impact.
“I think there would be more crushed if there could be more outflow,” said analyst Greg Kostal.
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“The margins would indicate that they could be or should be going faster and they aren’t, but there are some rail car constraints.”
The short-term theoretical profitability for canola crushers comes from sky-high old crop soybean prices but much lower old crop canola prices. July canola futures recently had a nice rally, but the price is still much less than the value of old crop soybeans.
Because canola and soybeans compete in the meal and oil markets, anything that creates booming demand for those classes of product from soybeans should help canola movement and prices.
Livestock feeders in the United States are extremely short of soybean meal, driving up prices for soybeans. July soybean futures have risen more than 15 percent since fall.
Canola will never benefit equally from a meal-based rally because canola seed has a larger oil content and canola meal is not as valuable per pound as soybean meal.
Nevertheless, canola should be seeing some benefit from the super-strength of old crop soybeans, but July canola futures are still significantly below last fall’s values.
Canadian canola crushers are not running their plants to the maximum, reaching only 81.2 percent of capacity on average this crop year and still running slightly below year-before levels for the week ending May 21, at 85.3 percent versus 85.9 percent in the same week last year.
The paper profits from a healthy crush don’t mean much to crushers if they can’t deliver their meal and oil to the good-paying U.S. markets before they disappear, said Ken Ball of P.I. Financial.
If Canadian crushers could arbitrage those markets and deliver all the meal worried U.S. livestock feeders want, old crop futures would be a lot better than they are now.
“July (futures) should be trading $30 to $40 (per tonne) over November, not because of any tightness but just because that’s what the relative meal and oil values are,” said Ball, describing old crop canola prices as “extremely cheap.”
“Efficient marketing and transportation of meal is critical to continued growth in Canada’s oilseed processing sector,” Jim Everson, executive director of the Canadian Oilseed Processors Association, said in an email.
“The vast majority of meal exports are to the United States, and there are unique aspects to meal transportation, including the north-south direction, the requirement for regular service to meet facility production schedules and generally smaller train sizes that affect efficiencies.”
Many elements of the prairie grain industry have complained about poor rail service through the winter, and the federal grain shipment order-in-service appears to have exacerbated the problems of farmers and grain companies that want to ship to the U.S.
Railways are preferring to push as much grain as they can toward Vancouver and Thunder Bay, leaving few rail cars, locomotives or rail capacity to ship product such as canola oil south.
“When there has been a bias on car allocations, it has seemingly been to those locations that service the east-west corridor more than north-south,” said Kostal.
“Old crop crush margins have been good, but there has been some hesitancy on being able to crank up crush as much as you would otherwise expect.”
There isn’t much time for crushers to grab the theoretical high profits for crushing canola. The spread between canola and soybean values collapses when the new crop is harvested.
There is currently a more than $70 per tonne futures premium on old crop soybeans compared to new crop soybeans, but only a $3 per tonne difference between old and new crop canola futures.
July canola futures are almost $73 per tonne cheaper than July soybeans.
When the new canola and soybean crops are harvested, their per tonne values will be virtually identical, taking away most of the ability of crushers to arbitrage the difference be-tween the two markets.
