A sharply smaller Canadian canola crop in a year when crushing capacity is expanding could create tight supplies that would buoy prices and force buyers to rethink plans.
Most Canadian crops are expected to shrink after cool weather and drought-delayed development. Farmers are hoping for later-than-normal frost-free weather to allow their crops to mature.
Amid such uncertainty, seed crushers are pressing ahead with expansions to boost Canadian capacity 50 per cent by early next year.
“If the canola crop comes in a little lower than expected, and both the crush and the exports come in a shade higher, canola supplies would start to pencil in pretty tight,” said Ken Ball, a futures and options broker with Union Securities. “It wouldn’t take much to get a good, strong market going in canola.”
Louis Dreyfus Canada Ltd. and James Richardson International Ltd. are each building roughly 850,000-tonne plants in Yorkton, Saskatchewan for opening late in 2009 and early 2010, respectively. Cargill added 750,000 tonnes of capacity to its Clavet, Saskatchewan plant this summer.
Canada’s Agriculture Department predicts a harvest of 10.3 million tonnes of canola, down 18 per cent from last year’s record crop but still the second highest ever. A harvest that large is in doubt, however, with crops needing ideal conditions to reach maturity.
“The demand is going to be very fierce,” said one canola futures trader. “I don’t know how (crushers) are going to source the grain.”
The industry crushed about 4.3 million tonnes of canola seed in the 2008-09 crop year. That figure will likely reach five million to six million tonnes in the new crop year, depending on when the plants start up, said Dave Hickling, vice-president of canola utilization for the Canola Council of Canada.
Tight supplies that push prices higher would sharply cut exports, he said.
Canada’s canola exports totalled a record 7.5 million tonnes for the 2008-09 crop year but may drop to a more normal volume of 5.5 million tonnes if supplies are tight, Hickling said.
China alone bought close to 2.8 million tonnes of Canadian canola, but that could drop to less than one million tonnes for the new crop, he said.
“If supply is limited, that does tend to mean stronger prices and we know that China is one of the first markets to drop off when prices go higher,” Hickling said.
With tight supplies, Dreyfus or Richardson might consider delaying the opening of its new crushing plant, Ball said.
“It might be a bad year to come on in the spring if canola supplies are tight,” Ball said.
Global factors are also influential on canola pricing, along with local supply and demand.
Tight U. S. soybean supplies and drought in Argentina are supportive to oilseeds. But the European rapeseed crop just being harvested appears to be bountiful in France and Germany. This has at times weighed on futures markets.
Demand for biofuel, a key use of canola oil, will also influence pricing, Hickling said.
The bottom line for the industry is that it continues to expand, even with the prospect of tight supplies, said Bob Broeska, president of the Canadian Oilseed Processors Association.
“You’ve always had the domestic crush capacity bidding against the seed exports and as long as there’s growth in the veg oil markets and the protein markets, it ends up being good for both the growers and the processors,” he said.