Canada: Canola’s biofuel link to raise volatility

Volatile canola markets will get even more turbulent in the years ahead as the biofuel sector consumes an increasing amount of the oilseed, says an analyst.

The Canadian Oilseed Processors Association (COPA) is forecasting that the biofuel industry will be buying 6.5 million tonnes of the crop per year by 2030, up from 1.8 million tonnes in 2020.

Canola production is expected to rise to 29 million tonnes, up from 20 million tonnes over that same timeframe.

That means the biofuel sector will be accounting for 23 percent of total demand for the crop by 2030, up from nine percent in 2020, according to COPA.

Ken Ball, canola analyst with PI Financial Corp., said the rapidly growing demand from the biofuel sector should make for an interesting ride in the years to come.

“It’s going to add a lot of volatility to the marketplace for sure,” he said.

The demand side of the canola balance sheet had been relatively stable for years, but that is already starting to change.

Futures markets have historically provided a good hedging tool for growers, but when markets are swinging by $100 to $300 per tonne it can be a wild ride.

“Even for the most experienced of futures players, it becomes quite challenging to play out these huge $200 to $300 swings in the marketplace,” he said.

Ball thinks growers need to educate themselves about other market tools like put options, which paid off handsomely this year.

“Even though there were very expensive, they were the big tool that made a lot of money for growers,” he said.

Errol Anderson, analyst with ProMarket Wire, agrees with Ball.

“I’m a real fan of options,” he said.

“The lowly put option has been just magnificent this past year.”

Several his customers bought put options a few weeks ago that guarantee them a price of $21.50 per bushel.

He agrees with Ball that options are a better marketing tool than futures markets in today’s topsy-turvy environment.

“The futures will always bite you,” said Anderson.

“There’s just too much fund action.”

Ball said cash pricing is another tool growers should consider, but buyers are not always offering cash prices when farmers are willing to sell.

He noted that while rising biofuel demand is a good thing for the canola sector, it is all based on government policy, which can be fickle.

Much of the future demand for canola is coming from the renewable diesel sector in the United States.

Ball worries that the food versus fuel debate is starting to heat up in that market, which could cool demand.

“They’re causing extreme inflation with their biofuel program,” he said.

Ball believes the U.S. is reaching a tipping point where policymakers might be rethinking the idea of converting food into fuel.

“The biofuel program does not seem to be bringing fuel prices down that much, if at all, but it certainly is driving the cost of food aggressively higher,” he said.

Ball thinks that might be one of the reasons why the U.S. Environmental Protection Agency’s proposed biomass-based diesel Renewable Fuel Standard volumes for the next three years were well below industry expectations.

Tags: markets, demand, volatile, canola, Oilseed, Production, crop, biofuel