What was a nice calm sideways market up until 2 weeks ago is suddenly seeing the highest volatility of all grains. Not in a good way either. May Futures opened at $473mt just 7 days ago and closed today at $444.50! That hurts, especially when you have a whole lot of your crop with open futures like I have recommended! So why am I not panicking? Foremost, this is a technically accelerated drop brought on by a rebound in CAD vs USD, it has NOTHING to do with Supply and Demand (not current or future anyway). Let’s step back and get some perspective.
Back in November the great debate was what would farmer’s report their final 2015 average yields to StatsCan as? Pre-report guesses ranged from 32-36bpa. Actual number came in at 38bpa. That is a Bearish surprise and should have driven the market lower. At that time I thought $440mt would provide some support, worst case could be as low as last winter’s low just under $400mt. The market never reacted though, have you wondered why? Dec 4 when the report was released CAD vs USD was worth 0.7474 less than 0.2% ABOVE today’s close. Literally the first trading day following the report CAD broke through support and trended all the way down to a low of under 0.69 on Jan 20, only to rebound back to Dec 4 levels today. Let’s eliminate the dollar for a second and see what happened to Canola value in US Dollars on the world market.
|Date||May 16 Canola Futures||CAD v USD||Canola in USD|
Focus on the Canola in USD column, what do you see? Canola did in fact take a Bearish trend following the StatsCan report, dropping by $29USD per mt on the world market. As a farmer you just didn’t see it as you are focused on your net price in Canadian Dollars, as you should be. This drop in world value you have to admit was justified, after all as the world sees it there was 2.7 million mt more Canola in Canada than what StatsCan had suggested just a couple months prior.
Now think back to your Econ 101, supply/demand/price curves. What happens when prices fall? Demand goes up. That is exactly what I expected, and exactly what has happened. Pre report we needed to ration demand to keep a reasonable Ending Stocks number, post report rationing was no longer required so all you had to do was offset the increased Supply with increased Crush and Exports motivated by lower prices and the end result doesn’t change much at all. In fact the offsetting Demand has been better than I hoped and Ending Stocks today are actually projected lower than they were pre report.
|Canola Mar 1||2014-2015||DLN 2015-2016||DLN 2016 Estimate|
|Seeded Acres ‘000||20774.6||20094.7||20355.0|
|Harvested Acres ‘000||20618.1||19973.9||20150.0|
|Production (‘000 MT)||16410.1||17214.2||15995.0|
|Total beginning stocks (‘000 MT)||3008.0||2321.7||1360.9|
|Imports (‘000 MT)||65.0||75.0||94.2|
|Total supplies (‘000 MT)||19483.1||19610.9||17450.1|
|Total domestic use (‘000 MT)||8030.4||8750.0||7655.0|
|Total exports (‘000 MT)||9131.0||9500.0||8704.0|
|Total demand (‘000 MT)||17161.4||18250.0||16359.0|
|Total ending stocks (‘000 MT)||2321.7||1360.9||1091.1|
Now that is all fine and good, but your price in Canadian Dollar terms is now $1.00bu less than it was in Dec. That hurts, I feel it too, believe me! BUT I have always believed that in the winter months you need to focus on what influence price is having on future supply vs current supply driving prices. What that means is what will you as farmers do in response to weak winter prices for Canola? Usually I expect 2 things.
- Slow farmer selling. Usually this just delays the inevitable, the supply is there, you might not sell it now but you will someday. I hate to tell you but not selling is seldom, if ever, effective in generating higher prices. No point in over analyzing this point because in CAD terms the price didn’t fall, and farmers sold at a controlled steady pace all winter.
- Decrease acres. This is the big question. So with poor projected returns, stiff competition for acres from Pulses, and a farm community which has not increased acres in 4 years, I had expected to see flat acres at best this year. With this slide happening simultaneous with StatsCan survey I am a believer that there is a very real possibility of a decrease in acres being reported in April.
Canola Demand trend has been consistently higher every year. This year as long as supplies were available was never destined to break that trend as we added 750,000mt of crush capacity, and even a 0.74 Loonie was enough to build sold Exports. The only time in the last 15 years we have decreased Demand year over year was in 2012/13. The only reason that occurred is that after Aster Yellow and a wind storm for the record books there simply was not enough available to meet demand. We have more than doubled crush capacity since 2008, and have yet to see it run a full 12 months at near capacity.
I don’t want to get too carried away here, I am sticking with my estimate I came out with initially back in Nov of 20.355 million acres, an increase of 1.28%. After adjusting my Domestic Use to reflect ytd crush utilization of 81.4% and bumping up exports to what could be a conservative 9.5 million mt you can see that things tighten right up this summer already. For next year we would have to ration off over 2 million mt of Demand vs 2015/16 to maintain Ending Stocks over 1 million. We have only been South of 1 million mt Ending Stocks twice in the past 10 years, after the floods of 2011, and following the Aster Yellow and wind reduced crop of 2012. You will recall that cash prices those year were much better than what we see today, much better than we saw a week ago before this collapse. While I am talking about prices it is a safe bet with road bans on and seeding around the corner buyers are going to have to narrow in Basis considerably to draw sales until Futures recover.
Low prices cure low prices, and the dollar equation has not held us back before. The last time things tightened up we had a par dollar and Basis narrowed all the way to positive $30mt or better to attract the sales. As hard as this is to watch, I have my neck out already and I am leaving it there. Acres plateaued a few years ago already, and since the record yield of 2013 Ending Stocks have dropped with each passing crop. In order to maintain a flat Ending Stocks in 2016 using 5 year average Demand (not trend line, which is an important differentiation) we “need” 21.5 million seeded acres to produce an average yield. Last year we seeded 20.09 million acres, and motivation for acres is actually negative. In my analysis this could create a very tight situation, explosively tight if we have issues getting seed in the ground or if we have adverse summer weather like has been common recently. The risk to all of this is a seeded acre survey that shows 21.5 million or more acres. That is only an increase of 7%, statistically there is a real chance this could happen. My analysis leads me to believe the probability is low, but marketing is all about knowing your risks, and the risk here is real.