Canola Prices Could Make 2020 a Make or Break Year

Canola Prices Could Make 2020 a Make or Break Year

Canola prices moved into 2020 on a bit of an upbeat note, but then again, after 2019, a sustained move higher has been nice to see. The question now, however, is can it last? Or rather, how long can it last?

There are a lot of frustrated voices out there, given the decent demand, smaller harvest, and the fact that there’s still a lot of 2019 crop that’s unharvested. When we think about what dictates the price of canola though, you have to understand that the market is already accounting for those unharvested acres (in the mindset of they will be harvested eventually), but also how much supply is still in the pipeline. In my last column for the Christmas holidays, I made this same point and its worth reiterating.

That said, canola prices did find some significant gains the last few days of 2019 and on a quarterly perspective, those 2020 contracts are looking pretty decent, considering that there’s supposed to be a 3.5 MMT carryover from 2019 crop into the 2020/21 growing season. Further, rapeseed prices on the European futures board in Paris found its highest levels for the start of a new year since 2013. However, most analysts agree that this isn’t a supply or demand-generated rally, but rather, a function of spillover from increasing prices of palm oil and soy oil.

Canola prices December 2019 monthly performance on the futures board

Canola prices Q4 2019 quarterly performance on the futures board

Canola Prices and Political Exports

One of the obvious drivers of canola prices is canola exports. Agriculture Canada suggested in their last update that canola exports will total 9.1 MMT, down 100,000 MT from their previous estimate but matching shipments from 2018/19. It’s a contrast to the 10.7 MMT seen in 2017/18 and record 11 MMT in 2016/17, but that’s what happens when China suspends export licenses of two of Canada’s major canola exporters (Richardson and Viterra) for political reasons.

AAFC Dec 2019 estimate of Canadian canola exports and prices

Said political reasons are is really just the Canadian detention in of Huawei’s CFO, Meng Wanzhou, on behalf of the United States, due to business dealings in Iran. Accordingly, I asked out loud in May 2019 if canola (and soybean exports) are really just a matter of politics now being the major ruling factor (instead of supply and demand). In the new-age world of protectionist policies, politics are increasingly front and centre for grain trade, and the impact on canola prices was/is pronounced. Very clearly, as you can tell in the char below, cash canola prices in Western Canada dropped like a baby giraffe out of the womb once politics became the major factor in late February. Only once some weather premiums came into the market in May 2020 (thanks to dryness in the Canadian Prairies) did canola prices start to rebound.

Cash canola prices for spot movement in Western Canada through Jan 3, 2020

Nonetheless, Canadian canola is still being shipped to China, in seed form, as well as more oil apparently. A few months ago it became apparent to the market that the UAE was importing more Canadian canola seeds and in turn, Chinese imports of UAE canola oil were up nearly 6 times what they were at the same a year ago. [1] Through Week 19 of the 2019/20 crop year, Canadian canola exports have totaled 3.43 MMT, down 7% year-over-year.

Canadian 2019/20 weekly canola exports through Week 19

Canola Prices Helped by Robust Crush

While we know Canadian canola exports hasn’t been much to write home about, domestic demand has been relatively impressive so far in the 2019/20 crop year. Put another way, the additional demand being seen from Canadian canola crushers has basically offset any reduced canola exports (relative to last year) and that is helping canola prices stay elevated. The major reason behind the increase in canola crush has been the improvement in canola margins.

That said, those margins were hovering around $100 CAD/MT in November and it’s possible that the highs are in, especially considering the recent strength of the Canadian Dollar. Through the last week of reporting before the Christmas holidays, the Canadian Grain Commission says that more than 3.3 MMT of canola has been crushed, up 8.5% year-over-year. [2] As a result, canola oil production is up 8.4% from last year to 1.4 MMT and canola meal output is up 8.8% to 1.8 MMT.

Rapeseed versus Canola Prices

That said, canola crush has slowed a bit but with AAFC calling for domestic use of canola in Canada to top 10 MMT for the first time ever (yes, a new record), this has helped canola prices rally a bit. This was also complimented by the downgrade of the 2020 Canadian canola harvest in early December, but with the Canadian Dollar now pushing up above 77 cents USD, international purchasing power has diminished a bit.

So where do the international buyers go if not buying canola from Canada? Australia’s canola harvest was another relatively poor showing because of the drought, with ABARES pegging the crop at 2.1 MMT, which would be a small decline year-over-year, but a 43% drop compared to the five-year average. Thinking into the 2020 Aussie canola harvest, there does not seem to be much optimism for rain or cooler weather in Australia according to the country’s Bureau of Meteorology. [3] Intuitively, this puts a larger area at risk to the ongoing fires, as well as dims the harvest 2020 prospects for Australian farmers.

ABARES Dec 2019 estimate of the 2019 Australia canola harvest

From a competitive standpoint, I continue to keep my eye on Eastern Europe as we’ve seen more rapeseed production coming out of the Black Sea. A growing rapeseed market in Ukraine, Kazakhstan, and even Romania is mostly a function of stronger demand from EU rapeseed importers, but what about Russia? While the country only planted 4.45M acres of rapeseed in 2019, the head of oilseeds for the German Seed Alliance, Sergey Tuchin, thinks that Russian rapeseed acres might top 12M acres before 2024. That said, average yields in Russia are still sitting around 27 bushels per acre, nearly half of what the average Canadian canola field produces.

Further west, the 2019 European rapeseed harvest was pegged at 3.44 MMT, about 1.5 MMT or 31% below last year’s haul. It’s also a 13-year low. With wet conditions negatively impacting the fall planting campaign (EU rapeseed is an autumn-seeded crop), the 2020 EU rapeseed harvest might be even smaller than 2019. This has very clearly opened the door for more Canadian canola exports heading to Europe, something I highlighted back in October.

Canola Prices: At the 2020 Highs Already?

Given the recent rally in canola prices, I’m starting to ask how much more room does the market have to run? Specifically thinking about new crop, compared to the same time a year ago, current available canola prices are pretty decent. Keep in mind that a year ago at this time as well, the political spat with China wasn’t yet in the headlines and the market was just trading fundamentals. Therefore, with the pressure of politics still in play, canola prices are actually looking fairly attractive.

Western Canada new crop 2020 canola prices through January 3, 2020

This is even more factual when you consider that this current rally is likely buying more 2020 canola acres in the Great White North, which I think could end up around the 21.5M acre level. The other factor to consider here is what will the 2020/21 crop year will begin with in terms of available supply. Yes, Canadian canola ending stocks were dropped by 1.2 MMT in the last estimate from Agriculture Canada, but there’s still 3.5 MMT expected to be carried over to the 2020/21 crop year. That’s the second-largest ever, after the 4.09 MMT left at the end of 2018/19.

AAFC Dec 2019 estimate of Canadian canola stocks and prices

What I think this ultimately translates into is that canola prices are trading off the notion that, even with the large carryout, there’s still robust demand out there, namely in Europe. While this is certainly supportive of canola prices, if you don’t make sales when you can (as in at today’s levels) instead of when you have t, then you are likely starting to question just how many acres you want to throw in your rotation. There are already some farmers who’ve taken canola out of their rotation completely. [4]

The bottom line here is that we’re near the seasonal high in canola prices and with the risk on the table of where canola prices trend sideways-to-lower into the growing season, today’s levels for both old and new crop are looking attractive to me. Put another way, how many times in the past year did you wish you could have priced more canola in January 2019? My guess is quite a few times and that should help influence what your canola marketing plan should be going forward.

Manage risk accordingly!

Brennan Turner
CEO
FarmLead
TF: 1-855-332-7653
contact@FarmLead.com
@FarmLead on Twitter

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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.

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