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Lagging ICE canola spread to attract more interest

Canola futures on ICE Futures Canada are lagging behind the U.S. soy complex, which is expected to bring more buying interest into the market, an industry official said.

"The current crush margins are attractive to a buyer; on paper they are quite excellent," said Ken Ball, a broker with Union Securities in Winnipeg. "The theoretical crush margin for a processor has improved quite a bit over the last month."

Canola crush margins have improved by about $30-$35 a tonne in the last month. He said canola is lagging behind the soy complex by about $22 a tonne (all figures US$).

Normally, canola margins range from at par with the U.S. soy complex, to holding a $100/tonne premium. A $50/tonne premium for canola over the U.S. soy complex is considered fair, said Mike Jubinville, an analyst with ProFarmer Canada.

Canola is lagging behind the U.S. soy complex because a number of factors are putting downward pressure on canola, while soybeans continue to be strongly supported, said Jerry Klassen, manager of Gap SA Grains and Produits in Winnipeg.

The progression of the canola harvest in Western Canada, and the anticipation that there will be a surge of farmer deliveries into the cash pipeline throughout the month of September, has put downward pressure on canola futures, he said.

Soybeans continue to be strongly supported as demand has not dropped off despite record high prices for the oilseed, he said.

"China is buying as many soybeans at $17 a bushel now as they did earlier in the year when prices were lower," he said.

Canola is also having a hard time catching up to the gains in the U.S. soy complex because demand for soybeans is stronger than the demand for canola, Klassen said, and more people are interested in soybeans because they contain more meal.

"Domestically there are very few substitutes for meal, and with soybeans having a higher percentage of meal, that’s contributed to more strength in the soybeans," he said.

Soybeans are 80 per cent meal and 20 per cent oil, while canola is 60 per cent meal and 40 per cent oil, Klassen said.

It’s difficult to predict when the spread between canola and the U.S. soy complex will tighten again, he said, because it will all depend on what actions China takes and what happens with the South American soybean harvest.

— Terryn Shiells writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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