Bill Craddock has seen a lot in his 52 years speculating in grain futures markets, but never $1,000-a-tonne canola on the crusher’s driveway — until last week that is.
On May 5 Manitoba farmers could lock in canola at $1,021 a tonne ($23.15 a bushel) with Altona crusher Bunge for delivery Aug. 1 to 15, Craddock, who also farms at Fannystelle, said in an interview.
After Aug. 15, when some newly harvested canola might be coming off the fields, the price drops to around $16 a bushel.
“Even though the (canola futures) market was up $30 a tonne (that day) they (Bunge) were paying a $100 (a tonne) premium over the futures market,” he said. “When you have a basis that’s positive it’s something, but when it’s $100 a tonne that’s remarkable. The price is $1,021 a tonne with the futures market at $905 or thereabouts.”
Most times crushers and grain companies pay farmers less than the futures price to cover overhead, transportation and profit. It’s referred to as ‘the basis.’
May canola futures hit a record $933.90 a tonne ($21.18 a bushel) and the July futures might even go higher.
“Ultimately I can see this going to $1,000 (a tonne), maybe more somewhere down the line,” MarketsFarm Pro senior analyst Mike Jubinville said in an interview May 5.
(MarketsFarm is owned by Glacier FarmMedia, which owns the Manitoba Co-operator.)
While new-crop prices are lower they are still strong, but with the spectre of drought farmers will carefully weigh the benefits and risk of forward pricing.
The steady rise in canola prices is good for farmers, but also a sign there’s little canola left, says Canadian Canola Growers Association CEO Rick White.
“The best fix for high prices is high prices,” White said in an interview May 5. “Farmers start to deliver against it and prices go down, but in this case prices don’t seem to be going down so the cupboard must be pretty much bare. Unfortunately thousands of farmers won’t be able to take advantage because they’ve already sold. But there will be some with some squirrelled away somewhere.”
Nobody knows where prices are going, but there are lots of guesses. Craddock, who taught agricultural economics at the University of Manitoba for more than 10 years before becoming a futures speculator and farmer in the late 1970s, wouldn’t be surprised to see old-crop cash and futures prices go higher as domestic crushers try to secure supplies to keep plants running until harvest this fall.
While new-crop prices of around $16 a bushel are much lower than current old-crop prices, Craddock says it’s possible that new-crop prices will go up in the near term.
“This morning you could’ve got $16.25… but I have been holding for $16.50 before selling another truckload,” he said May 5.
“This (record old-crop price) will not last. The price in October will definitely be lower than the highs it reaches this spring, but who knows where the high is this spring? I still think you can sell canola for fall delivery for around $17 a bushel. That’s sort of where I am heading for my next sale.”
New-crop prices will depend on canola production in Canada and soybean production in the United States, Craddock said.
Jubinville agrees. He expects strong new-crop prices will continue.
“The fundamentals in place are suggestive of higher prices yet, but it doesn’t mean prices need to go in a linear line upwards,” Jubinville said.
“I am leaning towards this May-June period watching how seeding progress develops and moisture conditions improve or not improve as a time frame when I would want to think pretty hard about doing some kind of forward pricing on new crop.”
Often new-crop canola prices peak in June… “but if the drought continues, well, all bets are off.”
Canola carry-over stocks are expected to fall to 700,000 tonnes, which is essentially zero in practical terms because it’s difficult to pull it together enough for export, Jubinville said. That’s likely to see canola exports slow. They hit 8.5 million tonnes as of Week 38 (April 18) — 17 per cent more than the same period last year.
“I think we are in the process of curbing export demand and leaving the domestic crusher as the real buyer for now,” he said, adding domestic crushers have a freight cost advantage. “It has to happen. If the domestic crusher keeps doing what he is doing and the exporter keeps doing what he’s doing we’re out of canola by June.”
That’s why an eastern Canadian crusher is reportedly importing 60,000 tonnes of canola from Ukraine in August, Jubinville said.
Crushers must fill canola oil and meal orders every month no matter the cost of canola, he added.
“So they (crushers) are prepared to go into negative margins if they have to… and the (canola seed) exporter is not,” Jubinville said.
“What price that takes is kind of anybody’s guess right now. While canola prices are going up, the byproducts — oil and meal — they’re going up as well.”
While new-crop prices are $4 or $5 a bushel under old crop, they’ve never been this high, this early in the growing season, according to Jubinville.
“The farmer is pretty bullishly minded right now too, but everyone recognizes these are very solid prices,” he said. “You are making good money on canola here. There is certainly a desire to lock in new-crop pricing, but I find it hasn’t been particularly aggressive yet. It might be because of looking in the rear-view mirror at these old-crop prices.”
Concerns about drought could also be keeping farmers from selling, he added.
“I definitely wouldn’t talk any grower out of the new-crop pricing opportunities we are seeing today,” Jubinville said, adding each farmer has to assess their risk tolerance given dry soils.
When a farmer locks in a price on a specific volume of crop they are legally obliged to deliver it. If they have a complete crop failure it will be expensive to either buy canola to replace what was to be delivered or to buy out the contract, he said. That is unless the price at delivery is less than what was contracted. In that case the buyer will walk away preferring to buy the canola at a lower price.
But usually in droughts prices go higher.
Crop insurance is a backstop, and now farmers can get even more coverage through the Manitoba Agricultural Services Corporation’s (MASC) new Contract Price Option, but it comes with a cost.
Craddock said since his canola yields haven’t fallen below 40 bushels an acre for years, he feels comfortable forward selling about 20 bushels an acre.
“Do it on a rising market,” he said. “Don’t do it on a falling market. And do it and hope you’re wrong. Hope that you should’ve sold it higher because you haven’t sold it all.”
Farmers face some tough decisions, White said.
“Some will get it right and some will get it wrong because nobody’s got the perfect crystal ball,” he said.
“The real risk is getting the crop up and running in a healthy way so they have good production because you can have double the price and half the production and you’re no better off.”
Canola prices are high because supply isn’t keeping up with demand.
“This is a demand bull market,” Jubinville said.
“The demand is so powerful it has pulled this market into territory that we have never seen before.”
Most of it’s thanks to China.
“China has been a big buyer basically of everything,” Craddock said.
At the end of March, Canadian Grain Commission figures showed China was Canada’s biggest canola seed buyer having imported almost 1.6 million tonnes with four months remaining in the crop year.
That’s still well below the five-year average 4.1 million tonnes China exported before March 2019 when it blocked Canada’s two biggest canola exporters — Richardson International and Viterra — from selling there, complaining shipments were contaminated.
It’s widely believed China is punishing Canada for arresting Meng Wanzhou, chief financial officer of China’s giant telecom firm Huawei, in December 2018 at the United States’ request.
Craddock, Jubinville and White expect strong canola prices will continue in the short and longer term. Normally such high prices would spark increased plantings, but Statistics Canada forecasts an increase of just 800,000 acres to 21.5 million.
With normal production the 2021 crop, with low carry-over stocks from 2020, will hardly keep up with demand, if it continues at the current pace, Jubinville said.
Canada’s canola-crushing capacity of 11 million tonnes will jump by 4.6 million tonnes, or almost 42 per cent, to 15.6 million by 2024 thanks to two new plants just announced and the expansion of a third — all in Saskatchewan.
“It’s good news for farmers all this crushing capacity,” Craddock said.
Meanwhile, canola seed exports to the European Union so far this crop year are slightly higher than those to China and are expected to remain strong as European farmers cut production partly because of pesticide restrictions, White said.
Canada’s new fuel standard will also see more canola oil used to make domestic diesel with lower carbon emissions, he said.
“When we look around the world both domestically and internationally the long-term prospects for canola oil and vegetable oil I think are pretty good,” White said. “These are big investments we are seeing here in crush capacity so companies are seeing it that way as well.”
Record canola prices won’t last, but they could signal a new trading range.
“Certainly in my mind the old highs could be the new lows — say $11 or $12 as the new low,” Jubinville said. “Will we even see that? I’m not sure, but I’m pretty sure we’re going to stay above it just because the demand pull is so strong.”
That said, ‘black swan’ events such as a loss of a major market, can occur any time pushing prices lower, he warned.