FarmLead Outlook for 2018 Canola Markets, Prices

As we discussed in our 2017 review of canola last week, there were some good opportunities to cash in big time in canola.

But 2017 is over and done with.

As we discussed in our 2017 review of canola prices and market structure last week, there were some good opportunities to cash in big time in canola.

But 2017 is over and done with.

In this in-depth assessment of the 2018 canola market, we’re going to cover such things as,

• Potential for another record Canadian canola crop;
The Euro Factor (of rapeseed that is);
The Great Wall of Chinese canola demand;
The rise of American canola acres, production, and demand;
How tight the canola oil balance sheet really is; and (of course)
When you should be selling canola in 2018 (and why!).

Right now in our canola factors page on GrainCents, we’re watching 8 different variables that we categorize as either bearish, bullish, or just noise for the complex.

If you’re wondering how we analyze things, you can easily read how we view and make sense of the grain markets here.

GrainCents canola readers also see our sales position for 2017/18 old crop and 2018/19 new crop.

Let’s dig into what FarmLead is expecting this year for canola prices and what’s going to be influencing them.  

Record 2018 Canadian Acres

Canola seed companies are perhaps the big winner here.

But what about canola prices?

It’s been estimated that anywhere from 1.5 – 2 million acres of Western Canadian soil what were planted with peas and lentils in 2017 will find different roots in 2018.

Including this past year of record acres, Canadian land seeded to canola in the past six years has averaged 21.2 million acres.

But we have a strong suspicion that 2017’s record of just under 23 million acres won’t exist after 2018.

With prices for pulses, malt barley, and durum wheat not really helping pay the bills as much as they used to, there’s a strong idea that this number could touch 24 million tonnes in 2018.

We know that there’s some decent demand right now in the canola markets and that’s certainly supporting values.

If we see some South American weather premium or domestic crush start to increase though, 24 million acres could honestly be low.

Right now, we’re expecting a number of anywhere between 23.6 and 24.1 million acres of canola in Western Canada.

Globally though, we’ve noted that rapeseed / canola acres are expected to be higher in 2018/19. And while this should be considered bearish, stronger demand is making it less bearish.  

 

The Great Wall of Chinese Canola Demand

China has been a heavy importer of rapeseed and canola for the past 20 years, let alone recently.

Heck, back in 1999/2000, China imported 3.68 million tonnes of rapeseed and canola!

Over the past five years though, the People’s Republic have averaged 4.5 million tonnes rapeseed and canola seed imported. Further, they’ve averaged another 791,000 tonnes of canola oil imports the past five years.

In 2017/18 though, canola/rapeseed imports are expected to a hit 4.7 million tonnes, with another 750,000 tonnes of canola / rapeseed oil imports.

And the oil component can’t be ignored, as Chinese consumers are expected to go through 8.1 tonnes of canola oil and rapeseed oil in 2017/18.

What’s for sure is that China needs to import canola and other oilseeds to satisfy its domestic demand.

As long as the government in China is willing to play nice (i.e. no dockage restrictions like was threatened in 2016), then we would expect this trend to continue in 2018.

And China’s not afraid to do it either! Just Google “Australia canola blackleg China” if you need a refresher.

Regardless, we’re reminded by the fact that at least 80% of Chinese canola imports are coming from Canada.

Keep in mind that next door in Japan, canola demand also remains relatively robust and Canada remains the number one supplier there. In the last five years, at least 90% of their rapeseed / canola imports are coming from Canada

Mexico is next in line with about 85% of their rapeseed / canola imports being of Canadian origin.

What all this math adds up to though, about 3/4s of Canadian canola exports go to three trading partners: China, Japan, and Mexico.

If the NAFTA deal isn’t effectively renegotiated, then we might see Canadian canola exports to Mexico dip a bit. On average, they account for about 13-14% of total Canadian canola exports.

Now, I don’t know the pre-NAFTA import taxes that Mexico had on canola (unlike barley, and they were huge!), but this is certainly a bearish scenario for canola. Anywhere from a couple train loads to a couple hundred thousand tonnes of canola may come off the board from Mexico.

To say the least, there’s a lot of uncertainty right now.

And this would add to the canola ending stocks in Canada, which is currently set at 2 million tonnes by Ag Canada and 2.2 million tonnes by the USDA.

2018-canola-outlook-canandian-exports-trading-partners

 

Rapeseed / Canola Oil: Tight Like a Tiger?

The 2017/18 crop year is expected to end with only 3.34 million tonnes of canola oil / rapeseed oil left in the world.

If realized, this would be the smallest since 2010/11.

Does it matter though?

My point is the vegetable oil production in 2017/18 has exploded, namely in pam oil. We’ve discussed the bearish connation of the vegetable oil complex multiple times for canola.  

In Canada, the situation is nowhere near as tight as it was in 2011/12 (back when canola prices were sitting beautiful at $16 CAD / bushel, remember!)

In 2010/11, canola oil ending stocks in Canada sat at just 98,000 tonnes. Then the following year in 2011/12, things dropped to 39,000 tonnes. They did jump back up to 71,000 tonnes the following year in 2012/13 but since then we’ve been on a tear.

It is notable though that 2017/18 Canadian canola oil ending stocks will drop nearly 25% year-over-year to 365,000 tonnes. But this is just 6% below the five-year average so it’s not super alarming.

The canola oil balance sheet in America is a bit tighter though at 94,000 tonnes. That’s a drop of 30% year-over-year and 20% below the five-year average.

Even China is expected to rapeseed oil inventories drop in 2017/18, albeit this could certainly be attributed to them selling off more of their (really) old rapeseed oil reserves.

The USDA is currently estimating that just under 2.1 million tonnes of rapeseed oil will be available in China by the end of the current 2017/18 crop year.

This is 23% below last year’s number and nearly 40% below their five-year average.

However, there is certainly other substation effects taking place, namely with palm oil.

Add in more import tariffs from the Indian government on vegetable oils, and you’ve got yourself a more competitive marketplace for vegetable oils.

Again, this is why we think the strength of vegetable oil production is bearish.

 

Stronger 2018 American Canola Acres, Production, AND Demand?

When you think of American oilseed production, it’s soybeans, right!

I mean, more than 90 million acres of the oilseed is going to get planted across the US in 2018.

But canola is started to make a name for itself.

In 2016, there were 1.71 million acres of canola planted in the US with North Dakota driving the bulk of that as they owned 1.46 million acres (or 85%).

The next year, American canola acres jumped 26% to 2.16 million acres. North Dakota again took top title with 1.7 million acres planted – or a 16% jump year-over-year and 79% of all acres. There were some other states that basically doubled their canola acres from the 2016:

• Oklahoma to 160,000;
Montana to 130,000;
Washington to 60,000; and
Kansas to 50,000.

American canola production in 2017/18 was just 1.28 million tonnes, down 9% year-over-year. This was because of the dry conditions in the Northern Plains, which dropped average US canola yields by nearly 25% year-over-year to 26.4 bushels per acre.

Domestic use of canola in the U.S. in 2017/18 American canola imports are pegged at 716,000 tonnes. But this is because it’s estimated that the United states will crush 1.85 million tonnes of canola in 2017/18.

Technically, that’s down about 8% from 2016/17’s record of 2 million tonnes, but it’s still 5% above the five-year average. Major American crush facilities are pretty close to the Canadian border and/or out on the west coast (i.e. Pacific Coast Canola, owned partially by Viterra).

Add in 128,000 tonnes of exports, the United States is expected to end the 2017/18 marketing year with just 91,000 tonnes of canola in their pipeline. This would be 15% below last year and 24% below the five-year average.

Needless to say, the US canola balance sheet will be tight by the end of 2017/18 so why wouldn’t you plant more?

Thus, like Canada, there’s strong speculation that canola acres in the US could increase again 2018. It certainly won’t a 26% jump like the year prior, but there’s obvious demand in the market. Further, we’ve discussed in the past how more soybeans going into the biodiesel market could open up the door for canola oil instead.

Well, the dry soils are a pretty big factor. Not everywhere in North Dakota is it dry, but a lot of places wouldn’t turn away a few good snows this winter, followed by some decent spring rains.

So, if there’s a hint of moisture, there’s going to be canola planted. The balance sheet is tight and values are profitable even with 10% lower yields than the 10-year average in the US (30.8 bushels per acre).

This is especially true when you compare it to the ROI of the likes of pretty much any wheat, malt barley, or pulses.

Of course, it’s a big money crop, making it a big gamble. But other than soybeans in North Dakota – which is also a big money gamble, mind you – canola may pay a lot of the bills for US farmers in 2018 (or at least those growing it).

Ultimately, if there is some good moisture events (which, erring on the law of averages, there should be), I think you could see 2.5 million acres of canola planted on American soil.

Without it though, you might see acres dipping back below 2 million. And that would, in turn, likely lead to more Canadian imports as the 2018/19 crop year proceeds.

That, in turn would mean some better prices, likely over the winter months of 2018 going into 2019.

 

The Euro Factor (of Rapeseed)

European rapeseed farmers are under a lot of heat right now, thanks to politicians sucking up to consumers (but that’s politics, right?).

But the European rapeseed balance sheet is a force of its own.

In 2017/18, rapeseed acres in the European Union were pegged at 16.7 million harvested. Only Chinese and Canadian farmers put more rapeseed / canola acres through their combines, at 22.88 and 16.8 million respectively

Sidenote: India is estimated to be a close 4th, at 16.06 million acres harvested.  After that it’s Australia (6.43 million acres), Russia (2.35 million), the United States (2.04 million), Ukraine (1.85 million), Bangladesh (618,000 acres), and Kazakhstan (556,000 acres) rounding out the top 10.

So, we know that Europe plants a lot of canola.

And this past fall there was questions though about if acreage would be above 16 million acres or not. This was asked because there was a lot of wet weather that negatively impacted the ability for farmers to plant the 2018 rapeseed crop.

However, more acres in the likes of France and the United Kingdom should make up for losses in Germany and Poland.

Most private estimates for 2018 EU rapeseed acres are around 16.5 – 16.6 million acres, which would be about 100,000 – 200,000 less than 2017.

Based on average yields of 56.5 bushels per acre, this would suggest 2018 EU rapeseed production could hit somewhere between 21 and 22 million tonnes.

Cue the jeers from the Canadian collective of canola growers – we indeed speculate that canola production in the Great White North could top 22 million tonnes in 2018/19.

But where Europe crushes it, is crush. Put another way, Europeans are serious about using up their own supply.

After China, the European Union is the number two importer in the world of canola / rapeseed.

This is because, despite their impressive 22.1 million-tonne rapeseed crop in 2017, they have demand to crush 25 million tonnes. Since the European Union became a “country” in 1999, rapeseed crush volumes in the bloc have grown by average of nearly 5% every year.

China’s rapeseed / canola crush volumes have only grown by an average of about 2% over the same time frame.

I do have to admit, however, that Canada and the US do boast respective annual canola crush volume growth rates of 7.5% and 6.5%.

Needless to say, Europe needs a lot of canola or rapeseed.

As such, this year, it’s estimated by the USDA that 4.2 million tonnes of canola / rapeseed will be imported by the European Union in 2017/18.

It’s been previously estimated by UkrAgroConsult that about 2 million tonnes of that rapeseed need could be filled by Ukraine.

The reminder will likely be a mix of Canada and Australia.

But Australia is expected to export 1.9 million tonnes of canola in 2017/18, which is down nearly 50% year-over-year thanks to the smaller canola crop in the Land Down Undaa (it was just 2.85 million tonnes).

For perspective, in the past five years, Canada has exported an average of just 281,500 tonnes of canola to the European Union.

However, the last two years have been impressive at 769,400 last year in 2016/17 and 432,000 in 2015/16. (yes, the years before that were really crappy to pull down the average).

Overall, we’re not banking on the European Union demand to be a major catalyst for 2018 canola prices.

Weather is obviously a different issue though. Taking just 5% of their production (or about 1 million tonnes) out of the equation creates a very tight balance sheet for rapeseed in Europe. It’s expected that the EU will end 2017/18 with 1.13 million tonnes.

While that’s technically a 4.6% improvement year-over-year, it’s more than 30% below the five-year average.

Obviously if you were to talk 500,000 or 1 million tonnes away from this, it would create more room for imports. Since Canada has the largest readily available, it’s the logical solution.

To date though, crop conditions in Europe look fairly benign but you need to be aware of what we’re watching and why as it could change our outlook down the road.

 

When Should You Sell Canola? And at What Price?

In 2017, we saw the best opportunities to sell canola in January, March, June, and July.

But this is 2018.

From a crop year perspective, we were selling 2017/18 all the way back in November 2016 through to July 2017.

We made sales in March 2017, and the two more blocks of 10% in June and July.

Yes, hindsight is 20/20. However, our grain sales recommendations are timestamped here for you to review at any time.

I thought about pulling the trigger on more canola sales in July but, I won’t lie to you, the fields were looking thin! I figured thought that at the time we could deliver on at least 40% of our expected production.

With those contracts now filled, we’re looking at new demand and weather premium opportunities to sell off of.

South America presents the obvious option. After all, the risk of a smaller soybean crop south of the equator helped create those sales opportunities in November 2016, January 2017, and March 2017!

The second is the strong pace of demand for canola in North America. For example, through December 31st, there has been 4.624 million tonnes of Canadian canola that have been exported. That’s 11% higher than the same time a year ago.

This is a positive sign of demand, considering that both the USDA and Ag Canada are expecting 2017/18 Canadian canola exports to climb only about 4% year-over-year to 11.5 million tonnes (which would technically be a record, eh!)

Domestic Canadian canola crush is expected to hit 9.1 million tonnes or so, which matches last year. Thus far, domestic disappearance of canola is sitting at 3.955 million tonnes versus 4.004 million a year ago.

More concretely, sales thanks to South American weather premium are likely to happen in the next 4 – 8 weeks. We’ll be selling both 2017/18 old and 2018/19 new crop here. For movement before road bans, $11.25 CAD / bushel handles and higher cannot be ignored for old crop (today there are a lot bids above $11 but for June / July 2018 movement in Western Canada).

canola-post-new-offer

After that, we’ll likely see some bearish pressures that discuss larger acres in North America. As discussed though previously, dryness remains a concern across many areas of Western Canada and the Northern Plains and could easily bring another sale.

Thereafter, it’s about getting the crop in the bin. Overall though, we’d like to be anywhere from 20 – 40% sold on 2018/19 new crop by the time the combines start to roll.

Our new crop sales likely need to be at levels where the futures market is around $520 – $530 CAD per metric tonne, if not higher. Relatively to your local market’s basis, this means a cash sale of 10% of expected production should happen anywhere starting at about $11.20 – $11.40 CAD / bushel and above.

The reason that our price expectations aren’t higher is because there is still strong supplies available in Canada. 

We’ll be also watching for new crop basis opportunities to take advantage of. Just make sure you understand the type of basis contract you’re getting into – we have a few resources you can read – through here in understanding the difference between default or currency-derived basis.

Again, I’m cognizant of the tighter canola oil balance sheet, but there’s a lot of substitutable options right now. And that’s why it’s a bearish factor in GrainCents.

Right now here our expectations for specific futures levels to get hit on the March 2018 front-month contract before the end of February 2018 (all prices listed in CAD / metric tonne, as on the Winnipeg ICE exchange)

• $515 – 99% (you’ll never hear us “it’s a guarantee”. That’s just bad risk management)
$520 – 80%
$525 – 60%
$530 – 40%
$535 – 20%
$540 – 5%

As we move past the March contract and into the spring seeding frenzy, we’ll look to update our price expectations.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.