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Expect demand rationing after StatsCan canola report

ICE Futures Canada canola contracts managed to move higher during the week ended Oct. 5 — but not before first hitting their weakest levels since June.

Speculative long liquidation and spillover from the harvest pressure weighing on U.S. soybeans weighed on canola prices for the first few days of the week. However, technical support was uncovered to the downside, and then Statistics Canada surprised the market with a much smaller-than-anticipated production estimate.

Given the disappointing yield estimates being reported across many parts of Western Canada this fall, everyone in the industry knew that the record 15.4-million-tonne canola crop StatsCan predicted back in August would be unattainable. However, just how much smaller the crop actually was came as a bit of a shock. The latest survey results took two million tonnes of canola out of that initial estimate, dropping total supplies below the 14.5 million tonnes grown the previous year. (The year-ago level was revised higher by about 200,000 tonnes, but the adjustments there won’t be enough to make up for 10-times-larger losses this year.)

The actual canola crop could still end up below the latest 13.4-million-tonne guess when everything is said and done, as the survey likely didn’t include all the crops lost to wind damage in Alberta and Saskatchewan in September.

Back when the industry was still working with a 15-million-tonne-plus crop, supply/demand estimates from Agriculture and Agri-Food Canada were predicting very tight ending stocks for 2012-13 of only 675,000 tonnes. With two million fewer tonnes to go around, the solid export and domestic crush demand being forecast will need to be rationed somehow, as negative ending stocks would be impossible.

Canola is already very expensive compared to other oilseeds, due to the tightening supply situation. Over the past month, crush margins have lost over $60 per tonne, which means domestic processors, making $120 for every tonne of canola they crushed a month ago, are now making half that. Canola was actually a better deal for end-users when it was priced at its highs near $650 per tonne, than at current prices of about $610.

Those processors book their supplies well in advance, and will keep running at a strong pace in the near term. However, the market will eventually do its job to ration demand, and another year of a record crush is now unlikely. International customers buying canola to crush themselves will also be forced to look to alternatives, which could lead to such things as China turning to cheaper palm oil over canola.

Harvest pressures

In the U.S., soybeans, corn and wheat were all lower during the week — with speculative long-liquidation the feature in all three commodities. The U.S. Department of Agriculture releases production estimates of its own on Oct. 11, and pre-report positioning accounted for some of the selling. Seasonal harvest pressure contributed to the losses in soybeans and corn, while wheat saw some pressure from the improving moisture conditions in the southern U.S. Plains.

Anecdotal harvest reports have been looking a little better than earlier expectations for both corn and soybeans, as farmers across the U.S. Midwest make quick progress bringing in this year’s crops. If either corn or soybeans see an unexpectedly large improvement on their 122.8 billion- and 35.3-billion-bushel respective estimates in the new USDA numbers, there could be an initial bearish reaction in the futures. However, the fact remains, supplies of both commodities are considerably tighter than they were a year ago. In 2011, U.S. farmers grew 147.2 billion bushels of corn and 41.5 billion bushels of soybeans.

Just as with canola, the lost production will need to be rationed somehow, or else supplies will run out before the South American crops are ready in the spring.

For wheat, U.S. farmers are in the midst of seeding next year’s winter wheat crop and could use some more moisture. More beneficial rainfall in the region would put some pressure on values, but the wheat market will also keep an eye on production issues in other parts of the world. There have been rumblings out of Russia recently that the country may limit exports this year due to drought issues and tightening supplies. If those rumours prove true, they would open the door for more North American exports.

About the author

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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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