Carryout is expected to shrink, supporting prices
Canola price prospects look good with China back in the market and a tight carryout forecast for 2015-16, says a grain analyst.
However, basis levels will do most of the heavy lifting because a huge South American soybean crop and prospects for another big crop in the United States will cap futures prices.
“Put the target in for $470 (per tonne) futures at some point and then wait for basis levels to go to $15 to $20 over later in the (new crop) year,” said Derek Squair, president of Agri-Trend Marketing.
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“We feel basis levels are going to get quite strong in the May-June-July time frame next year.”
His confidence stems from the prospect of a smaller Canadian supply and continued strong demand from export customers and domestic crush in 2015-16.
The first good sign of things to come is that China is again buying large volumes of canola after a hiatus caused by dismal crush margins in that country.
Squair said crush margins haven’t improved much in China, but buyers are worried prices could climb in Canada toward the end of the 2014-15 crop year.
“The industry is starting to believe we’re getting pretty tight on canola and we’re going to have a tighter carryout,” he said.
“And so the Chinese are just getting a little bit ahead of that and trying to buy canola now instead of waiting until June (or) July where it might be really tough to buy.”
Squair sees 1.75 million tonnes of carryout this year. That number is expected to shrink to one million tonnes in 2015-16 because of a smaller crop and continued strong domestic and export demand.
He expects production to fall to 14.5 million tonnes, down one million, because of reduced acreage and a return to normal yields.
That will result in smaller export and crush sales programs despite stronger demand for the product from the Chinese and expanded crush capacity in Canada. Squair sees 7.5 million tonnes of exports and 7.7 million tonnes of crush.
The export program could easily be 8.3 million tonnes next year if the supply was there. The International Grains Council is forecasting smaller crops in Australia, Ukraine and the European Union.
China is also expected to have a smaller crop. The U.S. Department of Agriculture is forecasting a two percent decline in Chinese rapeseed production because of reduced plantings and dry conditions.
Errol Anderson, analyst with ProMarket Wire, isn’t nearly as optimistic about canola prices despite the recent price rally.
“Canola is basically trading in a window that is probably $20 per tonne higher than we thought originally earlier in the winter, so this is good news,” he said.
However, he believes that window could quickly slam shut as an overabundance of soybeans, a glut of vegetable oil and a strengthening Canadian dollar weigh down prices.
“I think the U.S. dollar is too high and we’re ripe for a pullback, which would suggest the Canadian dollar could rally a bit,” said Anderson.
He believes the loonie could easily return to trading at US83 cents, which would be enough to push canola into a lower trading window.
That is why he believes growers should pounce on $10.50 per bushel canola when available.
“We’ve been suggesting to guys (to) take it because if the market turns nasty we’ll lose 50 cents real fast,” said Anderson.
“I don’t see canola going to $11 or $11.50 at all unless we have a real drought.”
Squair said a lot will hinge on acreage and how the season unfolds.
Agriculture Canada might want to pull out an eraser for the 2014-15 numbers when it pencils the acreage numbers into its supply and disposition report for 2015-16.
Poor rail car performance for the last half of December and all of January and February suggests there will be the 1.1 million tonne shift out of the export sales program and into the domestic crush program, Squair said.
