It appears that commercial demand for canola is picking up.
The basis on the November contract narrowed in some places to almost zero last week.
In a further indication of improving demand, the spread between the January canola contract and November is also narrowing to less than $4 a tonne from about $7 a few weeks ago. The $4 spread is less than the true cost of carry.
Grain companies maybe increased their efforts a little to attract canola deliveries, but farmers appear reluctant sellers.
Producers are still relatively flush after a string of highly profitable years and so have the ability to wait until the harvest lows are behind us. Many also contracted canola last winter and spring when prices were higher and have covered immediate cash flow needs.
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The basis and spread indicate solid upcoming demand, adding to an already strong pace of domestic use and exports this crop year.
The Canadian Grain Commission’s export figures show that 1.8 million tonnes of canola were shipped in the first 10 weeks of the crop year, up from 1.25 million at the same point last year.
It means exports are averaging 180,000 tonnes a week, which is a little ahead of the 161,500 tonne pace needed to reach Agriculture Canada’s export target of 8.4 million tonnes. Of course, deliveries and rail movement slow in the coldest weeks of winter so it is good to be ahead of the game now.
The pace of domestic crush is also ahead of what is needed to meet Agriculture Canada’s forecast for total crop year canola processing.
The forecast is 7.1 million tonnes, or an average weekly crush of 136,500 tonnes. So far, the crush is averaging 148,000 tonnes.
The profitability of crushing canola is similar to what it was 12 months ago but less than last winter and spring, when transportation problems pressured canola prices lower than what they should have been relative to soybeans.
Last week’s canola crush was at 80 percent of the capacity of members of the Canadian Oilseed Processors Association, which was a little less than the average capacity use for the crop year so far.
New capacity is coming online.
Bunge has begun operations at its new plant in Altona, Man., which has about twice the capacity of its old plant there. That should help drive the weekly crush higher.
If exports and domestic use reach the Agriculture Canada targets, then canola stocks at the end of the year should fall to a fairly tight 900,000 tonnes, down from 2.36 million at the end of 2013-14.
That should support canola prices, but remember canola operates in the wide context of the global oilseed market, which includes soybean, palm oil, sunflowers, cotton and peanuts. The record U.S. soybean crop and an expected record South American soybean crop will limit the potential for price rallies.
