Canola futures are off to a tough start this week. Down $4.70mt with a low trade down close to $7mt. Canola futures have been weak of late, mostly in sympathy for Soybeans, but short term there isn’t much in Canola to get Bullish about (longer term though I am more optimistic). Bearishness is easy to find in Soybeans lately, almost constant disappointing export data has been torture for any Bulls out there. The last couple days have started out weak and found end user demand to bring it back later in the day, we will see how today goes. The issue of the day is Argentine elections. The President elect there has made campaign promises of reducing or even eliminating export tariffs on Soybeans and Corn. It is believed that there is some pent up selling there as farmers have held for this to come true. Pretty sure they can’t put those changes into effect instantly, but no doubt this is a bearish development. The low day in current trading range on the January futures was Sept 4 when we closed at $459mt. If we should break that to the downside there is a range left last winter/spring between 458 and 438, then another down between 438 and 400. I really wanted to see us hold the current range, but more than one or two closes below 459 will spell short term trouble. It would be really nice to see a bounce before StatsCan report drops so there is some room below, but still above the 459 support. Sitting on or below that support on report day will be dangerous. There are few headlines which might give us that cushion now. I have been saying for awhile, and still believe that after a slight delay for farmer sales to dry up Basis will narrow in to get sales happening again which is necessary to meet strong demand. Making the near term Bearish, but drops in cash less painful than in futures.
What I read into this trend is a continuation of perception of the crop getting bigger which will be confirmed or refuted Dec 4 by StatsCan. I, like almost all others expect there will be an increase to Canola yield in that report. With this perception in place it is easier to follow Soybeans down than it is to buck the trend so down we go. This Bearish move is going to test my fortitude, but my analysis indicates that there is better news ahead for Canola prices. I do believe that there is real risk this current Bearish or sideways trend could easily persist through December and January or longer, but at some point pre-seeding I believe a reversal needs to happen.
The most important indicator I study is the 2015-16 Ending Stocks forecast. There are a couple questions that need to be answered in that table; 2015 yield, and a larger time sampling of 2015-16 demand.
The yield question will be “answered” in the Dec 4 StatsCan report. That answer will be debated far into next year, probably all the way to next harvest regardless of what the number is. Those of you who have been following me all crop year might remember my March pre-StatsCan seeded acre outlook? In March I had my ending stocks at just under 1 million mt (997,000mt), today I have it at 917,800mt. I did have things tightening up in July, but interesting to see it come full circle right back to where I started. Back then I wanted to hold new crop for a spring or summer rally, believing that deviation to smaller than my forecast would make a bullish run, and it did, later than I expected, but there was a nice rally in June/July to price into. In hind sight I wish I had been more aggressive, but we don’t get the benefit of hindsight in this business. Whether or not that rally came I was trying to plan to back end load Canola, thinking that of all of the grains Canola had the best chance of strength closer to the end of the crop year. I still believe this, but the data always has potential to foil any plan. Right now I am using a yield of 34.3bpa, just below the 5 year average, and 0.8bpa smaller than the 2014 crop. The late frost and early drought I still believe reduced overall yields. There are some really big yield estimates out there going into this report, I think many are mistaking “canola crop was amazing; considering tough conditions” for “canola crop was amazing”. To me “amazing considering tough conditions” means average overall as expectations going into harvest were at least 10-15% below average. In the last 6 years 4 out of 6 Canola yields have been between 33 and 35bpa. 2012 is the only year lower, you will recall tough conditions that year, but aster yellows and the Sept wind storm across all of Western Canada crushed that crop. The only year higher was 2013, that year was virtually free of any production threats, no frost, bugs, drought, or floods that year. StatsCan survey conducted in early September showed a yield of 32.2bpa. The December survey will no doubt be higher, using my own logic even 10-15% or 3-4bpa bigger. In my experience farmers are more likely to report lower than expected and let the truth come out later in the crop year than go the other way. When you put all of this together I still conclude a yield 34.3bpa is reasonable. We will find out in just under 2 weeks.
|Canola Nov 23||2012-2013||2013-2014||2014-2015||2015-2016||StatsCan|
|Seeded Acres ‘000||22021.0||20255.8||20774.6||19839.7||19839.7|
|Harvested Acres ‘000||21743.8||20160.1||20618.1||19584.7||19584.7|
|Production (‘000 MT)||13868.5||18551.0||16410.1||15235.3||14302.5|
|Total beginning stocks (‘000 MT)||707.4||588.1||3008.0||2321.7||2321.7|
|Imports (‘000 MT)||127.6||66.1||65.0||115.8||115.8|
|Total supplies (‘000 MT)||14703.5||19205.2||19483.1||17672.8||16740.0|
|Total domestic use (‘000 MT)||6813.5||7101.6||8030.4||8250.0||8250.0|
|Total exports (‘000 MT)||7301.9||9095.6||9131.0||8505.0||8505.0|
|Total demand (‘000 MT)||14115.4||16197.2||17161.4||16755.0||16755.0|
|Total ending stocks (‘000 MT)||588.1||3008.0||2321.7||917.8||-15.0|
|Source: StatsCan and DLN AgVentures|
The demand piece has been a good news story for Canola for several years. There is no reason this year should be any different. There is a new Cargill crush plant in Camrose capable of crushing 750,000mt that will crush this entire crop year. Weak Loonie should keep crush margins profitable, and export demand robust. With stated acres and yield I broke down above we would have to reduce exports by a half million mt in order to keep ending stocks near 1 million mt mark. This number should quickly gain attention once we get past this final yield number. I do not believe current prices will ration any demand. That means there is room for increased supplies (yield) which will just move to demand over time. The 500,000mt decrease in exports is equivalent to 1.1bpa. Therefore Dec 4 yield could come in as high as 35.4bpa and with demand in tact we would still be looking at a tight 1 million mt ending stocks number a few months down the road. Am I the only one who sees this? No, I don’t think so. It is just too soon to trade demand ideas. Supply remains the focus, and relatively speaking supply is still “growing”. Betting against supply data right now I would be quickly outnumbered and lose that battle. Demand is typically a later crop year story, in tight years like what I believe this will be, this information should start gaining attention in Feb to April, and heightened concern in May to July. Can you wait that long?
Since I am already trying to look further ahead than the market is trading, what sort of acres do we “need” in 2016 for Canola? If above assumptions come true we will decrease ending stocks for second consecutive year in 2015-16, if I apply 5 year averages in all categories to 2016, and use last year’s seeded acreage… ending stocks would go to ZERO! Canola yields performed well under difficult weather conditions this year, but returns are in the middle of the pack vs other crop options in the prairies. If I plug average conditions into my budgeting software I have Canola in the middle of the pack again next year. At some point we need to encourage more acres. At 5 year average yield of 34.5bpa we will need to see 1.3 million more acres than in 2015, a total of 21 million acres to achieve a still “tight” 1 million mt ending stocks number. I do not believe that is happening at these prices leading me to believe strength in March-May will be needed to motivate extra acres.
PS. Canola futures have recovered while I wrote this article, now trading down only $1.30mt.