Almost every time I talk to canola analyst Greg Kostal he says: “You have to remember, canola is just one of a number of vegetable oil consuming choices.”
And Monday he told me that he has to repeat that to himself often, just to keep it front and centre in his mind.
Because it’s very much the story of canola prices, and the crucial way of looking at canola demand.
Canola doesn’t determine most of its own price based on canola supply versus a hardcore canola demand. Just look at this chart of canola versus soybean oil prices:
That’s an incredibly tight relationship, and would probably look tighter if I had the skills to factor out the currency exchange impact. (Canola’s priced in loonies and soy oil in greenbacks.)
It was not always thus. At one time canola moved around much more in its own world of independent supply and demand fundamentals. Canola could move quite far out from soy oil and soybeans based on stocks of canola, production, useage. But now it’s much more tightly connected to soy oil prices than anything going on with canola production. A couple of analysts last week told me that it didn’t matter that Statistics Canada had found almost one million more tonnes of canola in stock than most people expected. Canola prices are set by the worldwide vegetable oil market. One million tonnes extra of one vegoil means little.
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And canola demand isn’t what it used to be. At one time canola demand was very inelastic, with a handful of domestic crushers and Japan making up most of the market. Any production that fell beneath their demands would make prices skyrocket; any production over their needs would cause prices to slump.
But canola now has a bunch of other buyers who come into and leave the market based on price alone. And even the big users are more easily able to substitute vegetable oils than they used to be able to do. So canola prices now get arbitraged almost instantaneously with other vegoils and supply shocks – like last week’s – don’t mean anything like they used to.
Last week, in fact, when StatsCan reported about 800,000 more tonnes of canola in stock than most expected, prices actually rose, following soy oil. How’s that for supply becoming irrelevant?
Basis levels don’t show the same phenomenon, so farmers often don’t notice how close the relationship of canola to other vegoils has become. If elevators are plugged or getting huge deliveries of canola, they don’t need to fight for the stuff regardless of what world futures prices are doing.
And when there’s lots more canola compared to soybeans, canola will become cheaper compared to soybeans. Marginal spreads will narrow and widen based on crop-to-crop comparisons.
But it’s worth understanding how overwhelmingly dominant world vegoil prices are becoming, because it’ll help explain why prices in the future will likely often seem to have almost nothing to do with canola production and the Canadian crop. Canadian canola is now just a drop in the world vegoil bucket, and canola is just another vegetable oil consuming choice.
