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Wednesday, June 15, 2016

What’s the best (and worst) that could happen to Canola

By Angus Brown  |  Source: ICE, CME, Trade

Key points

  • Canola and soybean prices have continued to rise on the back of tightening supplies.
  • Production problems in the US or Canada could see Canola prices head towards $700/t.
  • Better than expected production, and weaker demand would see prices track back towards $500/t.

2016-06-15 Canola Fig 1

2016-06-15 Canola Fig 2

2016-06-15 Canola Fig 3

After some rapid prices hikes in May, Canola prices have continued to edge higher in June, this week setting a new three year high. We saw a very similar price trend in July last year, before the market fell heavily. This week we look at the chances of a repeat of 2015, and what could happen if oilseed production prospects continue to wane.

ICE Canola Futures, and local canola physical prices, took another leg up this week, hitting $AUD569/t, which marginally eclipsed the July-15 high.  Figure 1 shows that canola is taking a back seat in this rally, which his being largely driven by soybeans, which in our terms sits at $585/t, a two year high. 

The United States Department of Agriculture (USDA) World Agricultural Supply and Demand (WASDE) report, released Friday night cut world soybean production and ending stocks, which somewhat confirmed the concerns already factored into prices.

Recent revisions to soybean supply and demand now have the USDA expecting oilseed consumption to outstrip production for both 2015-16 and 2016-17 (figure 2).  Obviously this causes a drawing down in stocks, and sees the stocks to use ratio falling to 13.9%, which is marginally lower than the 2011 to 2013 tight supply years. 

Figure 3 shows that while the oilseed stocks to use ratio is expected to be near the tightest levels on record, soybean prices in US terms remain 15-20% off the average of 2012-2014, and 33% off the peaks.  The much stronger US dollar will make it hard for soybeans to reach record levels, even if supply tightens.  Crop issues in the US could, however, see soybeans hit the 1400¢ level.  In AUD terms, at the current exchange rate this would put prices at $695/t, and canola wouldn’t be far off this level.

On the downside, there is the prospect of current high prices depressing some demand, and an average season seeing soybean and canola production shift higher, which might see stocks to use remain the same as 2015-16.  While this wouldn’t see prices return to the lows of early 2016, we could see values head back towards $500/t.

What does this mean?

It is unlikely canola prices will drop back under $500/t for the coming harvest, but there is up to 10% downside possible.  As such hedging part of this year’s canola crop would be advisable.  However, with La Nina now apparently a 75% chance, and the prospect of lower than normal summer rainfall in the US, there is the risk of canola values gaining up to $120 from here.

 

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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