Just when it needed one, a white knight has ridden to the rescue of canola in the form of a soybean oil rally.
It’s a pleasant turnaround for canola growers, considering that Statistics Canada surprised markets Dec. 4 by announcing that farmers had produced more canola than expected.
“It offers a cushion,” Greg Kostal of Kostal Ag Consulting said about the soybean oil rally, which has suddenly boosted crushing margins for soybeans and canola.
“If these type of margins were to sustain themselves for multiple months, you’d probably see half-a-million tonnes more canola crush than we would have expected two months ago.”
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It is a U.S. soybean oil rally that is driving the gains in crush spread, but canola is the bigger beneficiary because of the much higher oil content in canola compared to soybeans.
Canola seeds have 45 percent oil while soybeans are less than 20 percent, making the oil value dominant for canola but secondary for soybeans.
The soy oil rally has been im-pressive, built on a foundation of longstanding worries about Asian drought and hazy skies caused by fires in Indonesia that reduced palm oil production. However, the rally surged higher recently on hopes the U.S. government will increase soybean oil use in biodiesel and change the structure of support for biodiesel production.
U.S. lawmakers are considering an amendment in biofuel legislation that would shift a US$1 a gallon tax credit subsidy away from blenders, who can apply it to foreign as well as domestic vegetable oil, and toward domestic biofuel producers, who would buy more North American vegetable oil crops such as soybeans and canola.
“A producer credit would inject a bit more sustained crush margin than a blender’s credit would,” said Kostal.
Jon Driedger of FarmLink Marketing said better crush margins will help reduce the Prairies’ canola surplus this winter.
“It helps give them (crushers) a better bottom line and an incentive to keep their plants cranking along,” said Driedger.
Processors are crushing more canola this year than last year, and the effects of the soybean oil rally are just beginning to be felt.
“If the bean oil rally continues, it should help keeping that pace of crush going ahead of last year,” he said.
Canola crush margins had been weak for months.
The world soybean market is stacked with wild cards. The South American crop is growing, El Nino is happening, Argentina is reducing or eliminating export taxes on crops and China might begin moving stockpiles more aggressively.
Most of the factors have seemed bearish for months, but palm production problems in Asia and possible moves in the United States to boost biodiesel production have given a more neutral balance to the oilseed outlook.
“It’s helped offset some of that bearish tone we’ve had,” said Driedger.
U.S. soybean growers aren’t seeing many gains from the soybean oil rally. Even if U.S. crushers see moderate gains in crush margin, the U.S. dollar is high and soybean prices haven’t rallied much.
However, it’s better for canola, with a $15 per tonne gain in futures values since the fall low set in mid-November. That differential will likely continue if the soybean oil rally survives, favouring canola and other oil-heavy crops.
“It helps sunflowers and canola because they’re both high-oil crops,” said Mike Krueger of the Money Farm in Fargo, North Dakota.
The analysts said increased U.S. vegetable oil crop consumption for biodiesel would likely help canola-focused processors the most. That in turn would help reduce supplies of canola in North America, helping canola basis levels across western North America.
