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Wednesday, November 25, 2015

What’s going on with Canola?

By Angus Brown  |  Source: ICE, Trade

Key points

  • Canola prices have fallen $50 from the peak in early October.
  • Price declines have been caused by both easing international markets and harvest pressure forcing basis lower.
  • There is some upside for basis, while the international market needs to see some strength in soybean values.


2015-11-25 Canola Update FIG 1

2015-11-25 Canola Update FIG 2

2015-11-25 Canola Update FIG 3

The last three weeks have seen Canola prices in track markets fall up to $45/t. This is just at the wrong time as Canola harvest rolls on and growers look to sell what Canola they have managed to harvest. So what has happened with Canola supply and demand that has caused prices to fall?

The two main factors that have seen Canola values fall have been a weakening international oilseed market and a fall in local basis on the back of harvest pressure.

Figure 1 shows the price of CBOT Soybean Futures and ICE Canola Futures, with both contracts seeing a fall of around $50 from the peaks of mid-October.  The soybean harvest in the US, along with improving crop prospects in South America, has seen soybean values ease by around 10%.  The situation is not being helped by murmurs of weakening Chinese demand.

Canadian Canola values have largely followed soybeans lower, and lost a little more since October as supplies in Canada are relatively abundant.  Canola is, however, still holding a strong $43 premium to soybeans: this premium has been closer to $5 for much of 2014-15.

Locally, track Canola prices have fallen more heavily than the international price (figure 2). This is due to the fact that prices with a ‘5’ in the front, and $30-60 better than last harvest, have encouraged growers to sell into a falling market. 

There may have been a case of the local price being overdone in October. Yields surprised to the upside, and eased concerns surrounding the ability to cover local demand and booked export shipments.

Figure 3 shows how local canola prices remain at a strong premium to ICE Canola. Basis is currently at $45, having eased with harvest from $60/tonne.  Local basis peaked at $30 last harvest, so there is an argument that basis could weaken further. That said, this seems unlikely as we are in peak supply now, with growers who warehouse grain likely to aim for higher prices.

We could actually see a kick in basis when grower selling pulls up. This happened in early December last year, when it returned to October levels, after following a downward trend in November.

What does this mean?

Of the $50 fall from the peak in track canola prices, $35-40 can be blamed on the soybean market and $10-20 on harvest pressure.  Major upside will have to come from an increase in soybean prices. This would occur on the back of some sort of supply issues in South America, or increasing demand from China. 

There is likely to be some upside in basis, maybe up to $20/t once selling pressure eases, and further basis downside seems unlikely.  For those who have to sell, using a cash and call strategy on ICE Canola, or even US soybeans will gain access to the majority of upside, while holding physical has a smaller potential payoff, but is more likely.

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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