Hot and dry weather across most of the major North American growing regions remained the major topic of discussion in the grain and oilseed futures markets during the last week of July. The drought will certainly cut into the size of this year’s canola crop, but by how much?
The 19.9-million-tonne forecast by Agriculture and Agri-Food Canada was off the table as soon as it was released on July 20, with actual production likely millions of tonnes smaller. Anecdotal reports of drought-stricken crops could be pointing to a crop below 15 million tonnes, although that remains to be seen, with some estimates still topping 17 million tonnes.
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Prairie spring wheat looks like a bumper crop
Canada will likely set a new record for spring wheat yields this year, topping the previous mark of 54.1 bushels an acre set in 2020.
In any case, production will be down from the 18.7 million tonnes grown in 2020-21 and demand will need to be rationed in some way. Domestic crushers have locked in profitable margins, and so should at least attempt to keep operating at a similar pace on the year, which means exports will likely take a hit in the new crop year.
November canola has come down by nearly C$100 per tonne off of its highs, hit earlier in July. However, at about C$850 per tonne at the end of the month, it is still historically high. The price could easily come down by another C$100 and still be considered very strong. Such a decline is possible, but it is more likely that the general uptrend remains in place with sporadic profit-taking swings.
What price is needed to tell end-users that they maybe don’t need to buy canola? That’s the question the futures market will be trying to answer over the upcoming weeks, especially as the harvest starts up and yield reports start to trickle in.
While a C$100-per-tonne move is dramatic, traders are generally of the opinion that such large price swings are becoming more normal in the futures. ICE Futures has widened the daily price limits for the commodity, aiding the volatility.
In the United States, Midwestern weather is expected to be a major market-moving factor for corn and soybeans over the next few weeks. Heat and dryness have cut into the condition ratings, but it’s still earlier in the growing season for those crops and only about a third is being grown in the major drought areas.
Meanwhile, an estimated 99 per cent of the U.S. spring wheat crop is being grown under drought conditions this year. A crop tour of the Dakotas and other spring wheat regions during the week confirmed disappointing yields, which helped the Minneapolis futures spread widen over the winter wheats.
Just as in canola, spring wheat prices will need to find a level to ration demand, with higher proteins but lower yields likely to lead to some interesting activity in the cash markets going forward.
