Canada: сanola prices still have room to grow: analyst

The bull market for Canadian canola will eventually reach its peak but there may be room for record prices to go even higher, says an ag commodity market analyst with MarketsFarm.

In a March 17 webinar, Mike Jubinville said underlying market factors continue to support prices for Canadian canola, despite record values.

“I think it’s a little early to get started on a sustained downtrend in terms of price,” Jubinville said.

“I do feel there’s a great deal of support for the underlying market.”

Markets for Canadian canola have reached stratospheric heights in recent weeks, with some marketing opportunities in the range of $24 to $26 per bushel.

At those extraordinary prices, some market observers consider canola to be overpriced and due for a correction.

Record prices currently on offer are cause for consideration and are probably worthy of some forward contracting, Jubinville suggested. But there are reasons to believe that canola prices may not have peaked just yet.

World vegetable oil stocks are already tight, with the global stocks-to-use ratio expected at around 8.2 percent.

Uncertainty about the status of Ukraine’s rapeseed and sunflower crops is fueling additional procurement concerns.

Ukraine is the world’s top producer and processor of sunflowers. Alone, the country accounts for about 50 percent of global sunflower oil exports, with most of that production destined for the European Union.

“Acreage this year is probably going to be about the lowest we’ve seen in 13 years,” Jubinville said.

Over the past few years, annual sunflower plantings in Ukraine have been in the range of 16 to 17 million acres, data from the United States Department of Agriculture show.

According to some estimates, this year’s plantings could be as low as 2.5 million acres.

Military conflict in Ukraine has also prompted the closure of all Ukrainian crushing plants.

This, combined with the closure of major export routes through the Black Sea has left EU sunflower oil importers concerned about short-term procurement opportunities.

According to European trade sources, 250,000 to 300,000 tonnes of sunflower oil was due to be exported by Ukraine in late February and March.

It is expected that total exports in the short-term will be significantly impacted.

Canada’s contributions to global oilseed supplies were also down sharply this year, due to drought-reduced yields.

Jubinville suggested Canada’s total exports of canola seed in the 2021-22 marketing year will top out at around five million tonnes.

To put that into perspective, Canadian exports exceeded 11.7 million tonnes in calendar year 2020 and 8.3 million tonnes in calendar year 2021.

Statistics through the first 31 weeks of the current marketing year show Canadian exports are already at 3.9 million tonnes.

If exports continue at that pace, full-year exports could be in the range of 6.5 million tonnes, but Jubinville sees that as an unlikely target, given current inventories.

“I don’t think that’s possible,” he said.

Current crop-year ending stocks are already expected to drop as low as 1.1 million tonnes, Jubinville said.

At that level, the cupboard is essentially bare.

“I know in history we’ve never had ending stocks lower than that,” he said.

“I think we need to have at least a million tonnes (on hand) at the end of the marketing year, so I kind of consider that my zero line,” he added.

“We’re going to need supply to carry us through August and probably into September before new crop comes online.”

The spread between Canadian canola and EU rapeseed offers another perspective.

As of last week, EU rapeseed was fetching a premium of roughly C$100 a tonne over Canadian canola.

“It’s not unusual for rapeseed in Europe to be priced at a premium of $40 to $80 over Canadian canola,” Jubinville said.

That spread accounts for costs associated with shipping Canadian canola to European destinations.

“Right now, based on this $100 discount — canola under European rapeseed — I don’t consider canola to be overpriced in this environment.”

Even considering a just-harvested Australian crop estimated at a record 6.4 million tonnes, high oilseed prices will be required to ration consumption of tight global inventories.

“I think that rationing process for Canadian canola — whether it’s through exports and even our own domestic crush to some extent — I think that process needs to continue.”

Other factors, including oilseed demand from the rapidly expanding U.S. renewable fuels industry, are also supportive of Canadian canola values over the longer term, Jubinville suggested.

According to statistics from the U.S. Energy Information Administration, actual capacity in the American renewable diesel industry is likely to triple in the next two to three years, rising to an estimated 3.5 billion gallons a day, up from around 1.1 to 1.2 billion gallons currently.

Jubinville compared the potential impact of biodiesel production on North American oilseed prices with the market impact that ethanol production had on North American wheat prices years ago.

In addition, domestic demand for Canadian canola shows no signs of slowing.

Canadian crush capacity is expanding rapidly, especially in the West where several new crushing facilities and existing plant expansions have been announced.

When all the proposed projects and expansions begin operating, Canada’s crush capacity is expected to grow to around 17 million tonnes a year in 2024, up from the current 11.4 million tonnes.

At current values, Jubinville said, it’s hard to imagine that some forward contracting won’t take place.

But additional upside potential may exist, he added.

“It’s not always going to be an (upward trend) on canola. Obviously, these are very volatile markets…. But I do feel that there’s a great deal of underlying support to the market.”

“We’re looking at new crop prices upwards of $20 a bushel fall delivered,” he continued.

“I can’t imagine that’s not worthy of some thought for forward contracting, especially in those areas where the soil moisture profile is favourable,” Jubinville said.

“But… the trend is our friend. I would consider doing some forward contracting but at this point, only dipping your toe in the pond I think is something that’s really required at this point.”

The Western Producer

Tags: yields, markets, export, canola, prices, Canada