Not a whole lot……relative to expectations there were no huge surprises. The size of the Canola yield increase is bigger than expected and should get the most attention. They also slipped in an extra 255,000 seeded and 389,000 harvested acres. Net impact is almost 2 million mt more production than I had, 3 million more than previous report. That is big, really big. Makes 2015 the second best crop on record, below only 2013. I have believed all along Canola came through this years conditions better than other crops, but am shocked at how optimistic 26000+ surveyed farmers were to get to this number! Oat and Barley yield bumps were bigger than average guesses too, but decreases to harvested acres offset some of the increase neutralizing the story in my mind. Only small upward revisions to Pulses, not big enough to calm down those markets I don’t think. Yellow Peas and Lentils still need to try to figure out how to reduce Exports in a market where more Demand than ever is present. Prices aside I think at some point grain companies and brokers are just going to have to hang the “Sold Out” sign and go on vacation. The world is going to want more than we can offer. Someone out there is still holding, and somebody will still be holding next fall, there always is. At these prices, if you are that guy, you are way too attached to your Lentils and Peas, or have way too much money. All Wheat production is actually down a bit which extends the already known assumptions that we are tight relative to the rest of the world. Durum acres up a bit, and yield right on expectations. No meat on that bone if you are trying to pick a direction for CWAD bids.
As I have eluded to in the past I will be adopting these Acreage and Yield numbers. It no longer matters if I agree or not, or if the data is correct or not. It is there in black and white so the important players (farmers, end users, brokers and grain companies) will use these numbers. What they believe is what will move the market so there is no point in fighting the data. After a week or so of digesting these numbers the focus for the rest of the winter will now move over to the Demand side of the ledger.
|Canola Post Dec 4 StatsCan||2014-2015||DLN 2015-2016||Stats Can Dec Report 2015-2016|
|Seeded Acres ‘000||20774.6||19839.7||20094.7|
|Harvested Acres ‘000||20618.1||19584.7||19973.9|
|Production (‘000 MT)||16410.1||15235.3||17214.2|
|Total beginning stocks (‘000 MT)||3008.0||2321.7||2321.7|
|Imports (‘000 MT)||65.0||115.8||115.8|
|Total supplies (‘000 MT)||19483.1||17672.8||19651.7|
|Total domestic use (‘000 MT)||8030.4||8250.0||8250.0|
|Total exports (‘000 MT)||9131.0||8505.0||8505.0|
|Total demand (‘000 MT)||17161.4||16755.0||16755.0|
|Total ending stocks (‘000 MT)||2321.7||917.8||2896.7|
|Source: DLN AgVentures and StatsCan|
Let’s dissect the headliner first. Canola saw huge supply increase on this report, and should be immediately Bearish. I will argue that in the long term this is not Bearish, but short term that argument is tough to make. There are a couple who, like myself have shifted focus to demand earlier and understand that healthy demand could still match this overall supply. Usually though there is an immediate response to an adjustment of this scale. In this case, a negative one. First thing this morning it looked as expected, Futures were down $8mt at one point. But as the day wore on Futures recovered to close basically unchanged. Why? is the obvious question. With Canola futures there are more significant “outside” influences at play than in all other grains. Canola will trend with Soybeans, the reasons are obvious, it is a substitute, Soybean market is more liquid, crush margins, and overall Demand will all depend on the spread between Canola Oil and meal vs Soybean Oil and meal. Today Soybeans were higher, Soybean Oil higher, but meal slightly lower, net impact supportive for Canola. Of course to compare the two you have to convert to either CAD or USD to compare apples to apples. The Loonie lost against the Green Back today with the USD rebounding to recover back some of yesterdays big losses against Euro and all other European currencies. A loss of only 0.22% still gives about $1.05mt of support to Canola. Wheat, Corn, Soybeans, and Oats were all higher on the day lending support. Gold, Silver, Copper, and Platinum were all up today which helps a bit. Chart was set up in a short, weak Bullish trend rebounding after the Argentine election nearly broke us through key support to the downside. Way down a bunny trail here, but the point is Canola Futures will take time to show the true reaction to this report. The data is Bearish beyond much doubt, but having recovered and created some space above $459 Futures support it is possible that the sideways $460-480 on the nearby range will remain intact. Similar fundamentals last year took us down to $400 futures in the winter, but rebounded to $540 in the summer. Either, or both of these outcomes are possible, dare I say likely?
And with that I turn the page to Demand, which should be focus for next 90 days and important all the way to year end. Based on current environment and year to date (ytd) I don’t think it is unreasonable to think we could match the last 2 year’s demand. Those two years we achieved 9.1 million mt Exports each. China’s chatter of economic slow down is a fly in the ointment, but that is more a Soybean story which brings in Argentine Government and tax changes, USD and other issues which have much less impact on Canola. It is reasonable to expect China to match recent imports of Canola, Canola Oil, and Meal, US has a bit more Canola available this year, but they face a major currency headwind vs us, Australia will have some exportable Canola, but it wasn’t a bumper crop there either and they are a small player in Canola. Let’s stay conservative and use 8.75 million mt of exports this year, with the knowledge that there is upside to that number as long as there are not major changes to this market short term. Regarding Domestic Use (mostly crush with a little seed and waste and spoilage) the ytd is similar to Exports, slightly ahead of last year. This also makes perfect sense as we have a new crush plant in Camrose capable of crushing up to 750K mt per year and there were no explosions that I know of causing extended shutdowns like Louis Dreyfous had in Yorkton last year. Why so many people had crush numbers down going into this report and so far this year really makes no sense to me at all.
The only significant year over year decrease in crush was in 12/13 when Aster Yellow and Sept wind storm took away so much yield that both Yorkton plants, and Harrowby just couldn’t keep running full. They bid all the way up to $30mt over to try to keep the plants going. Wouldn’t it be nice to see that again? It is that sort of bid that rations demand, and we have seen nothing like that this crop year. That shortage drug into the first quarter of 2013/14 as well, otherwise the trend has been strong and consistent increases. I just can’t wrap my head around a Crush number short of 8.25 million mt, and like my Export number I am leaving plenty of room for upside to that number.
The immediate impact to the balance sheet, without adjusting anything but the Acres and Yields StatsCan gave us today is 2 million mt more Canola Ending Stocks than I predicted, and 500K more than last year. You don’t have to be an analyst to see the Bearishness of those numbers. Thankfully domestic Crush and Exports both had room for increases. I eluded earlier to my issue with most Canola balance sheets out there going into this report being low Exports and Crush which had no justification, except that we didn’t have enough to supply large demand. Futures price has made no effort to ration demand, weak Loonie does not discourage demand, cheap ocean freight does not discourage demand, additional crush capacity this year and good weather and rail performance all contradict the low numbers that were out there. In reality our current scenario should be encouraging demand, not decreasing it, and statistical crush and exports now over 15 weeks into the year confirm demand at a pace ahead of last year. Here is where I think we sit today:
|Canola DLN Dec 4||2014-2015||DLN 2015-2016|
|Seeded Acres ‘000||20774.6||20094.7|
|Harvested Acres ‘000||20618.1||19973.9|
|Production (‘000 MT)||16410.1||17214.2|
|Total beginning stocks (‘000 MT)||3008.0||2321.7|
|Imports (‘000 MT)||65.0||115.8|
|Total supplies (‘000 MT)||19483.1||19651.7|
|Total domestic use (‘000 MT)||8030.4||8250.0|
|Total exports (‘000 MT)||9131.0||8750.0|
|Total demand (‘000 MT)||17161.4||17000.0|
|Total ending stocks (‘000 MT)||2321.7||2651.7|
|Source: DLN AgVentures and StatsCan|
But wait….you told us to wait it out. Yet net your S&D balance sheet still shows building stocks, that is not Bullish?! Firstly remember I believe my demand numbers to be conservative, if Canola makes a Bearish short term move that should allow for another half million mt or more demand which starts to take us below last year. This is where I shift to new crop, and to the cause and effect theory discussed recently. This Bearish news has the potential to keep Canola prices flat to down for the rest of the rotation decision window. Even with the miraculous yield numbers reported today I believe farmers know they dodged a bullet and were saved by yield. Low $10bu prices don’t make you rich with average or poor yields. I don’t expect everybody to assume they will be this fortunate again. This will lead to decreased acres, acres lost to extremely profitable pulse crops lets say. For the sake of argument, I will factor in a small reduction to 19.5 million seeded acres.When you combine the effects of increased demand and decreased supply caused by low prices the picture starts to change. In this scenario with a 5 year average yield we could run the bins empty of Canola in the 2016/17 crop year.
|Canola DLN Dec 4||2014-2015||DLN 2015-2016||DLN 2016|
|Seeded Acres ‘000||20774.6||20094.7||19500.0|
|Harvested Acres ‘000||20618.1||19973.9||19200.0|
|Production (‘000 MT)||16410.1||17214.2||15328.0|
|Total beginning stocks (‘000 MT)||3008.0||2321.7||2151.7|
|Imports (‘000 MT)||65.0||115.8||94.2|
|Total supplies (‘000 MT)||19483.1||19651.7||17573.8|
|Total domestic use (‘000 MT)||8030.4||8500.0||8500.0|
|Total exports (‘000 MT)||9131.0||9000.0||9000.0|
|Total demand (‘000 MT)||17161.4||17500.0||17500.0|
|Total ending stocks (‘000 MT)||2321.7||2151.7||73.8|
|Source: DLN AgVentures and StatsCan|
Of course when you start looking more than 18 months out there is plenty that will change this outlook. The thing most likely to change this outlook is higher prices. If we shake off this report and see better prices we could see less demand, and more new crop acres. So I will be “wrong” but it will be because we have higher prices so I will happily adjust my outlook, sell what I am holding at higher prices and move on. Basically we need higher prices soon or there will be a need for higher prices later.
If you stayed with me this far, congratulations! Most people fell asleep a couple paragraphs back, and the rest stopped reading the first time they found the word Bullish!! My eyes are fuzzy, and my brain clouded with scenarios so other crops will have to wait until next week.