March 27th: GrainCents Canola Sales Position Update

Good Day!

Canola prices, at this time of writing (12:45PM CST), are sitting at the following levels on the Winnipeg ICE Futures board: 

• May 2018: $523.50
July 2018: $528.20
Nov 2018: $515.90
Jan 2019: $519.40

Currently, we are sitting at 80% sold on our 2017/18 old crop canola and 30% sold on 2018/19 new crop canola. We are recommending sales today  but it’s very important that you read through the following to understand why.

Our last canola sales recommendation was officially back on March 1st, almost 4 weeks. We also had an upside strategy prepared on March 7th should the following day’s March WASDE report turn out to be bullish for oilseeds. However, bigger US soybean ending stocks offset any soybean production changes in Argentina, and our upside strategy was effectively nullified.  

canola-prices-seasonality

Since then, in the past 3 weeks, canola prices have pulled back and are now basically sitting where we were at our last sale. What’s happened since then? A couple things. 

First, soil moisture risk in Western Canada has decreased, thanks to a couple of recent dumps across the Prairies. While it definitely provided the opportunity for the snowmobiles to run for a few more weeks, it’s also alleviated a lot of fears that it’ll be too dry. On the contrary, i’m now hearing that the thaw will be late and seeding will start late. I’m chalking this up as noise today – there’s a lot of things that can happen between when a crop gets planted and when a crop gets taken off. Sure, the seeding date is important but so are about another 100 factors. 

Second, we know that in this Thursday’s USDA Prospective Plantings report, we expect to see more canola acres for the 2018/19 rotation. This comes as farmers are pulling out of soybeans and/or corn in northern states like Minnesota and North Dakota. This is intuitively bearish. Adding to it is the likelihood of record soybean acres in the US. Something above 91 million is certainly in the mix. 

Third, we have the April WASDE report that comes out on Tuesday, April 10th. The USDA will likely show another downgrade to the Argentine soybean crop, with most expectations being that they’ll drop from their current estimate of 47 million tonnes down to where private estimates are around 40 – 42 million tonnes. While this is certainly bullish in nature, the market is already pricing this in against what is going to likely be a third-straight record US soybean crop. Further, if you remember at our discussion over how much Argentina soybean weather premium could drive canola prices from back on March 4th, using the 2008/09 drought in Argentina as a benchmark, canola and soybean prices topped late March / early April 2009. 

Fourth, there will not be a trade war between the US and China. China needs American soybeans. The math completely proves this – they’re expected to import 100 million tonnes in 2018/19 and Lord knows that there’s not going to be a ton of them coming out of Argentina! If anything, once the US soybean crop has been taken off and the final size is known in November, only then would China dare to impose some sort of tariffs on US soybeans. Thus, until then, no canola will be substituted for soybeans in the People’s Republic. But by then, we’ll have our own 2018/19 new crop canola in the bin to sell! 

Fifth, we’re getting close to some technical levels of resistance that the market has not been able to push past twice in the past 5 months! Demand hasn’t necessarily rallied much (see crush numbers below) and this push higher has been basically all speculative.

2018-03-27-canola-domestic-demand

Basically, what we’re saying is that any bullishness in the short-term will be offset by the bearishness of the idea of a large North American canola and soybean crop. This will likely be further confirmed by StatsCan’s Acreage Estimates out on April 27th. 

Now, we’re extremely cognizant that North American weather premium comes into play, but those highs are seen usually sometime between the middle of June and the middle of July. 

But in the last 3 weeks since the March WASDE, the downside risk to both canola and soybean prices have increased. There is about a 20% chance that we see higher prices than where we’re at today sometime in the next 3 months. 

Thus, our official recommendation is to move to 100% sold on 2017/18 old crop canola, selling off the July 2018 contract This is managing risk and especially if you’re cognizant of the potential for higher interest rates, this is important. If you’re willing to gamble on higher prices sometime in the next 3 months, I’d recommend moving to at least 90% sold today and only play with the last 10%. You should be posting a target/GPO $1 – $3 above your main canola buyer’s bids for June or July movement.  

For 2018/19 new crop, we’re looking to lock up another 10%, to move to 40% sold, selling off the January 2019 contract. If there does happen to be some weather premium priced into the markets in the next 3 months, you’ll see it on either the November 2018 or January 2019 contract (the most significant move will likely be on the January, like it was last year). Like old crop, you should be posting a target/GPO $1 – $3 above your main canola buyer’s December bids today.  

End all, be all, we’re recognizing the increased downside risk to the canola market at this time for both short-term price prospects on old crop canola, as well as the stronger possibility of a big canola crop in North America in 2018/19 (not to mention the world – we mentioned in this past Sunday’s canola digest that the IGC just raised their forecast to a record level of 75.6 million tonnes). 

Happy to answer any additional questions you might have over email, text, or phonecall .  

Brennan Turner
President / CEO
1-306-715-4540 (cell)
b.turner@farmlead.com
FarmLead – North America’s Grain Marketplace

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
Sarah Bader

Sarah Bader is a science communicator, dedicated to cutting through jargon and getting to the heart of the matter. A lifelong nerd, communications allows Sarah to share her love of science and tech with a wider audience. Sarah has a BA in Communications and Sociology from the University of Ottawa.

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