Supply shortage complicates market

Canada is expected to produce less than 17 million tonnes of canola this year, down sharply from the usual 20 million tonne crop. This could leave vegetable oil consumers in a bind if U.S. soybean production also falls short of current forecasts. | MIKE RAINE PHOTO

This year’s drought means there will be more demand than supply of new crop, and some buyers may have to do without

The process of driving off demand for Canadian crops has begun.

But rather than smooth, orderly braking, the process is likely to be full of jolts and swerving, as if attempting to avoid a crash, says Mike Jubinville of MarketsFarm.

“You pump the brakes. That’s what happens even in the canola market,” said Jubinville in a midsummer new crop market outlook.

“There’s going to be a period of time where we’re going to have these violent corrections in the market .… Is this the ultimate top (to prices?) Who knows? Maybe it is, but I think we have to maintain some pretty high prices throughout the marketing year, and so far the cash markets have been countering a bit of the correction we’ve seen in the futures market.”

For crops like canola, oats and high protein spring wheat, there is more demand than supply of new crop. Some buyers are going to have to back away from all of those markets in order for supplies to not run out.

Which buyers retreat, and at what price, are key market questions today. Some buyers are more committed than others, but who exactly is committed and who has the option of backing off remains to be seen.

“Where do these buyers go?” said Jubinville of Canadian canola’s main customers, including domestic crushers and Mexican, Japanese and American processors.

He doubts any of them will be willing to reduce production or be able to find big enough alternative supplies to fill their needs.

“The canola market has done a wonderful job, over the course of 10, 15, 20 years, of cultivating a very reliable user base, both domestic and foreign,” said Jubinville.

“To have this sort of curtailment is going to be an interesting dynamic to see how this plays out this year.”

Some buyers that don’t tend to value canola as highly, such as European biodiesel producers and users in the Persian Gulf and south Asia, might find non-canola vegetable oils that they can swap in. They might not find much luck with alternative canola sources since it’s hard to make up for the shortfall in Canada.

Rather than a 20 million tonne-plus crop, Canada is now likely to produce less than 17 million tonnes of canola. That’s a big drop.

But vegetable oil consumers might be stuck if United States soybean production falls further than U.S. Department of Agriculture is currently forecasting.

The world also relies on Canada for its oats. The U.S. uses Canadian oats to supply about 60 percent of its oats, so some buyers there are likely to bring in boatloads of Scandinavian oats this year.

However, prices have to stay high in Canada to convince farmers to harvest drought-ravaged crops.

“The price needs to stay at a level that’s going to incentivize farmers to harvest that crop and not bale it,” said Jubinville.

High protein spring wheat is also at a premium in North America due to Canada’s drought being also felt in the Dakotas. Spreads between lower protein winter wheat and high protein spring wheat are likely to remain strong to sort out those who must have high protein milling wheat and who can make do without.

Barley, too, will need to see continuing high prices to sort out which buyers for malting, domestic livestock feeding and overseas feeding are most committed.

Jubinville said the recent crop market selloff is typical of bull markets but not proof that the best prices are already behind farmers.

Driving off demand happens over time, as individual buyers assess their needs and come to terms with the supply and demand situation. Price volatility is likely.

“This doesn’t all have to happen in one month,” said Jubinville.


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