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Wednesday, February 24, 2016

History suggests a rally for canola

By Angus Brown  |  Source: WCE, Trade

Key points

  • Canola prices generally rally over the first half of the year, with downside limited based on trends of the last 10 years.
  • Current ICE Canola prices in AUD terms are below the 10 year average, although better than most of the last 2 years.
  • Initial hedging targets for Canola should start at $530/t, but there is upside potential to $550/t.

2016-02-24 Canola Fig 1

2016-02-24 Canola Fig 2

While local canola markets have managed to remain relatively steady since harvest, internationally values have been on the wane. As we approach the traditional autumn hedging window, it’s worth having a look at how canola prices have behaved during the first half of the year in the past, which might point towards some price targets for canola hedging.

Like it or not, the nature of Australia’s export focussed canola market is that in most years it is driven by international canola and rapeseed supply and demand. Even in the recent harvest, when canola production was at its lowest level in 5 years, local prices couldn’t break away from international values, although basis has been at the upper end of the range.

Looking forward, planting decisions will soon be made on planting canola this year, so growers will want to start thinking about hedging plans for the coming crop.

Historically canola prices show strength in the first half of the year, with figure 1 showing the ICE Canadian based Canola Futures Contract average monthly price. Over the past 10 years market lows have been seen in January and October, and the peak in June.

On average ICE Canola rallies consistently through the first 6 months of the year to post a 7.5% gain between January and June. Figure 1 also shows that prices can vary widely, but over the last 10 years canola prices have only fallen once over from January to June, by 2% in 2011. On the other hand, canola has gained more than 15% three times (2006, 2008 and 2012), and up to 17%.

As the northern hemisphere oilseed crop matures and is harvested, canola prices fall from July to October, and we saw this trend borne out last year, with heavy price falls.

ICE Canola values are currently sitting at $CA468/t for the spot contract, and at $479/t for January 17. At current exchange rates this equates to $478 and $493/t in our terms. Figure 2 shows that while these levels are good compared to the past two years, they are below the 10 years average of $515/t.

What does this mean?

This historical analysis is relatively positive for canola prices over the coming six months.  The trends of the last 10 years suggest that we should be somewhere near the bottom of the market until June, with upside potential to $550-560/t. 

For those planting canola initial hedging targets should be around $530/t, with further sales made if the market continues to rise.  With the average basis of the past 5 years, a swap at $530/t equates to physical prices of $550-560/t, which is good selling in most years.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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