Every year between now and seeded acre survey release in late March or early April I make and revise new crop seeded acre estimates. I base my estimates on last years Gross Margin performance and this years projected Gross Margin performance at the time of rotation planning (ie: now). I take signals from my clients and their new crop seeded acre plans, and I rely on my experience and historical data to do my best to determine what the outcome will be, and what the market implications of those outcomes will eventually be. Sometimes, like this year, there are some obvious changes to come. The price signal to Lentil, Pea, and Chick Pea growers and non-growers has been clear. INCREASE SUPPLY AS MUCH AS POSSIBLE. What isn’t clear yet is what is possible. I have spent a great deal of time on analysis, and as a result am aggressively sold on those crops already so let’s leave them on the back burner today (at least until we see what developments come from Crop Production Week). Second only to the Pulse story in my interest is what is happening in the Oilseeds, specifically Flax and Canola. There is not a compelling Gross margin signal from 2015 or projected in 2016 to change acres of either crop much, but if we don’t adjust acres the Supply signals and eventual market outcomes could be very different for these two crops as we move into 2016 growing season.
Since there are 10x more Canola acres, let’s start there. Canola Gross Revenue based on average costs/agronomics and StatsCan December yields ranks just below the top third of crop options in Western Canada. Canola certainly didn’t hurt very many farms, but it didn’t make anybody rich either. Outside of the Gross Revenue analysis I think the yield resiliency under less than ideal weather last year will help motivate a few acres. Offsetting that motivation though is stiff competition from other crops able to be seeded into cereal stubble (Pulses), particularly in the Brown Soil zone. Looking forward to 2016 Gross Margin with same cost assumptions as above, and a 5 year average yield, Canola once again falls right around the middle of our cropping options. Looking at historical data I could make a strong argument that Canola acre growth trend has plateaued since peaking just over 22 million in 2012. Since that peak we have had 3 years of between 20 and 21 million acres. 5 year average now sits at 20.355 million acres. With no financial motive to seed more acres I just don’t think the emotional benefit of resilient yield performance is enough. The other headwind we face if trying to increase acres is that last year’s yields, even with leveled off acres, created enough Supply to basically balance off Demand and neutralize Ending Stocks for 2015 compared to 2014. Cash and Futures prices over the next 60 days will struggle to rally with this old crop S & D, and I expect no help from the Soybean market. Low dollar and good crush will support strong Demand, but realization of that Demand will come largely too late to buy 2016 acres. My conclusion for now, is that with all of this considered we will seed 20.355 million acres in 2016.
With these acres and a 5 year average yield of 35bpa in 2016, I would project Ending Stocks to fall by 10% vs 2015 to under 2 million mt. 2 million mt Ending Stocks is an important pivot point in my mind. Slipping below 2 million means we are getting close to a 10% Stocks to Use ratio. 10% Stocks to Use is just too tight and would certainly mean higher prices. I am not projecting that tight yet, but slippage of only 1bpa would bring that 10% Stocks to Use scenario into my outlook.
|Canola Jan 11, 2016||2013-2014||2014-2015||DLN 2015-2016||DLN 2016 Estimates|
|Seeded Acres ‘000||20255.8||20774.6||20094.7||20355.0|
|Harvested Acres ‘000||20160.1||20618.1||19973.9||20150.0|
|Production (‘000 MT)||18551.0||16410.1||17214.2||15995.0|
|Total beginning stocks (‘000 MT)||588.1||3008.0||2321.7||2151.7|
|Imports (‘000 MT)||66.1||65.0||115.8||94.2|
|Total supplies (‘000 MT)||19205.2||19483.1||19651.7||18240.9|
|Total domestic use (‘000 MT)||7101.6||8030.4||8250.0||7750.0|
|Total exports (‘000 MT)||9095.6||9131.0||9250.0||8625.0|
|Total demand (‘000 MT)||16197.2||17161.4||17500.0||16375.0|
|Total ending stocks (‘000 MT)||3008.0||2321.7||2151.7||1865.9|
|Source: StatsCan and DLN AgVentures|
We can’t forget the “D” in my S & D in my projections either. I have Exports and Domestic Use (crush) falling back by a half million mt each, a total demand decrease of 1 million mt for 2016. In the last 15 years we have never decreased demand when supplies were available. The only breaks in the very strong Demand trend were the 28bpa crop wreck in 2012, and the frost reduced crop of 2004. You will probably recall it took $14bu and +$30mt Basis levels to ration off demand in 2012/13. Leveling off or any recovery of the Loonie, or continued heavy Soybean supplies could accomplish some Demand moderating even in a neutral price environment, but I hope you are getting my point here. If prices aren’t going to encourage Supply and break through the seeded acre plateau, then prices will eventually have to ration Demand and create a plateau to match. This has been, and will continue to be my justification for holding off on Canola sales, and for positioning previous sales off of the July or November Futures contracts. There are several weather outcomes this spring and summer that would be bullish if we don’t find more acres before seeding.
Flax Gross Margins have been top 3rd in recent years, but slipped lower last year to finish middle of the pack, behind Canola. Even with surprisingly strong New Crop indications Flax still trails in the bottom 3rd of crop options in 2016. Flax gets no sentimental love either, the wet mild fall this year made harvest a challenge, and low quality high dockage the result.
Flax seeded acres have been volatile recently, Triffid caused export issues in 2009 that took 6 years to fully recover from. During that recovery past Flax growers have moved onto other crops, Canola being one of them. Flax trash management is always a concern, and most would argue it doesn’t do much good for the soil either. It is inexpensive to grow though, and while yields never blow your mind, yield wrecks are few and far between. A month ago when old crop dropped to the low $10bu range I had thought Flax acres would be quickly shaved after everything that Flax guys endured last year. Bouncing back to near $12 is very encouraging considering we grew a decent sized crop(Thank you Weak Loonie). New crop indications in the high $11bu range will also help maintain acres. In the end though Flax is no competition for Pulses, and out profited by Canola and Durum (even if by a small amount) in the Brown soil zone. I expect acres to be lost, but am having a hard time putting a number on it. Over the last 15 years the average acreage change in Flax is about 275,000 acres, if I take 275,000 off of last year I get 1.365 million acres, 5 year average is 1.39 million, so I am taking a shot and going to say 1.35 million will be the 2016 Flax Seeded Acres. It’s as good a guesstimate as any, like Canola then I end up at the 5 year average. That is where the similarities end though.
The trouble for Flax starts with the 2015/16 Demand estimates. Even with the weak CAD Flax exports have lagged vs last year and vs average. After Triffid blocked us from the EU we became dependant on China. Economic issues there are well documented, and until very recently Flax was one export product you could point to and say Chinese Import Demand is slowing. If it weren’t for our weak and getting weaker Dollar we wouldn’t be getting any shipping going South to the US either. Their Flax acres were up and yields were solid in 2015 and should be again in 2016. It appears we may have turned a corner as exports have picked up recently, but there is a long way to go and my concern is that current demand projections might be high. Demand for Canadian Flax outside of the first 3 years after Triffid ban have been solid and dependable. Over the last 15 years excluding those anomaly years we average 80,000mt of total Demand.On the back of a strong 730,000mt Export program for the 2014 crop there is some room to slip lower for a year or two. I have some optimism that continued weak Loonie, cheap ocean freight, and low rail competition in Canada can “fix” Export program and still come in at a respectable level, even if it is 15% off of the high years.
The other challenge for Flax in my mind is that I believe current situation is giving false price signals. Price should be saying “decrease acres and supply”, but after all is said and done at close to $12bu for 2015 and 2016 production I believe the farmer will hear a “maintain supply” signal and not decrease acres enough to allow for oversupply to make it’s way through the system. Unlike Canola the risk here is if we beat the average yield by just 1bpa we could build Ending Stocks in 2016/17. Even if Exports next year recover to second largest post Triffid, we could still be looking at the largest Ending Stocks ever. Record Ending Stocks following this year’s strong rebound to a comfortable 344,000mt Ending Stocks could spell trouble for bids for next year’s production.
|Flax Jan 11, 2016||2013-2014||2014-2015||DLN 2015-2016||DLN 2016 Estimates|
|Seeded Acres ‘000||1070.0||1585.0||1640.0||1350.0|
|Harvested Acres ‘000||1043.0||1534.0||1595.0||1300.0|
|Production (‘000 MT)||730.7||872.5||944.0||792.5|
|Total beginning stocks (‘000 MT)||70.8||92.0||96.9||343.9|
|Imports (‘000 MT)||14.0||10.1||10.0||11.6|
|Total supplies (‘000 MT)||815.5||974.6||1050.9||1148.0|
|Total domestic use (‘000 MT)||107.4||147.0||107.0||120.0|
|Total exports (‘000 MT)||616.1||730.7||600.0||623.0|
|Total demand (‘000 MT)||723.5||877.7||707.0||743.0|
|Total ending stocks (‘000 MT)||92.0||96.9||343.9||405.0|
|Source: StatsCan and DLN AgVentures|