Canola values try to ration demand as stocks tighten

Chicago soy and corn are running at eight-year-plus highs

If canola continues to disappear at its current rate, we would wind up with available supplies of negative half a million tonnes by the time a new crop is ready.

The ICE Futures canola market continued its meteoric rise during the first trading week of May, as the ongoing story of tight supplies remained supportive.

Statistics Canada confirmed the tightening supply situation with its latest stocks report, released May 7. Total canola supplies in the country as of March 31 were pegged at only 6.6 million tonnes. That compares with 10.5 million tonnes at the same time a year ago and would mark the tightest stocks at the end of March since 2013.

Factoring in exports and domestic processing over the past month, as reported by the Canadian Grain Commission, total canola supplies in Canada in early May should be sitting somewhere around 5.1 million tonnes. The current usage pace can’t hold up over the final three months of the crop year, as continuing at the current pace would result in the impossible situation of a deficit of about 500,000 tonnes before the new crop is available. Something has to give, and for now that means prices are climbing higher to ration demand.

Eventually the commercial demand will all shift to the new-crop months, which will leave the old crop to the whims of speculators. That could result in more fireworks, with a number of technical indicators pointing to front-month canola over $1,000 per tonne.

For the new crop, prices may be well below the ‘casino contract’ front months, but levels are still at their best ever and trading well above $700 per tonne. Weather conditions through the growing season will likely become more important in the months ahead, as end-users will be hoping for a larger crop to help alleviate the current tightness.

Updated drought maps from Agriculture and Agri-Food Canada show worsening drought conditions in southern Manitoba and southeastern Saskatchewan, with timely rains needed going forward.

In the United States, soybean, corn and wheat futures were all stronger during the week, with beans and corn hitting eight-year-plus highs. Solid worldwide demand for vegetable oil was a driving force in the bean market, as Malaysian palm oil hit some of its best levels in 13 years.

However, it was corn in the driver’s seat for the U.S. markets during the week, rallying on the back of drought concerns in Brazil and cool weather in the U.S. Midwest.

Wheat was largely a follower, with the gains in corn making milling wheat pencil in as an option for livestock feeders in some cases.

Dryness in Canada and the northern U.S. spring wheat regions was especially supportive for Minneapolis wheat futures during the week. Spreads between the three wheat contracts may see more adjustment if weather concerns persist.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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