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Tariff war, U.S. farm aid spur volatility in canola

Canola also faces pressure from a bearish supply outlook

Canola prices were up and down like a yo-yo last week in what was a volatile commodities market, be it the Intercontinental Exchange (ICE) or the Chicago Board of Trade (CBOT).

Coming off the Victoria Day long weekend, ICE canola bids began the week down 20 to 80 cents per tonne, then jumped by about $3.60 per tonne on Wednesday, only to fall by about $3.75 Thursday. The week wrapped up with gains of around $2.60.

When boiling down all of the influences providing support or weighing on canola values, the bottom line came down to the trade war between the U.S. and China.

Although canola has been able to show some independence, its price is very much connected to the trials and tribulations of soybeans. In turn, those CBOT bean prices have followed each positive and negative note of the 10-month trade war between the world’s two largest economies.

As with Canada having been very dependent on canola exports to China, it’s a very similar situation for the U.S. and its soybeans. China has been the biggest importer of U.S. beans, and the trade war has seen prices drop by US$2 per bushel.

Reports of U.S. farmers receiving US$2 per bushel compensation for their soybeans from their federal government drove down prices — and canola followed. By the time U.S. Secretary of Agriculture Sonny Perdue announced the US$16-billion aid package on May 23, it didn’t have too much effect on commodity prices. Perhaps that was partly due to the fact that the amounts received by U.S. farmers will be according to which counties they’re in and the acres they planted in 2018 – not the bushels they produced. As of May 27, Perdue had yet to attach any per-county dollar amounts.

The ag secretary blamed this hefty aid package squarely on China’s reluctance to buy vast amounts of U.S. soybeans. However, China has bought large quantities of beans from South America rather than from the U.S. before, so it’s not like this is unheard of. Add to that the enormous crops Brazil and Argentina have produced this year, plus an already abundant large global supply.

Commodity prices also fell on the prospect of the U.S.-China trade war dragging the global economy to a slowdown, or even into a recession. Crude oil prices, especially as North America’s all-important benchmark, West Texas Intermediate, fell by more than US$3 per barrel last Thursday. That dour outlook pulled down prices of practically everything on North American commodity and stock markets.

Canola demonstrated some independence last week, first with prices falling due to the May outlook for principal field crops from Agriculture and Agri-Food Canada. One factor central to the outlook was the forecast of back-to-back record carry-overs for canola. The 2018-19 crop year has been projected to have a carry-over of 3.9 million tonnes and a larger 5.3-million-tonne carry-over the following year — all primarily centred on China’s canola import ban on Canada.

Dry conditions in Western Canada also provided some independent support. The prospect of canola having a tough time germinating and growing this spring helped to bump up bids.

But for the most part, each coming chapter in the U.S.-China trade war saga will continue to have a ripple effect, with canola following in the path set by soybeans.

About the author

Columnist

Glen Hallick writes for MarketsFarm specializing in grain and commodity market reporting. He previously reported for Postmedia newspapers in southern Manitoba and the province’s Interlake region.

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