Take a wide view to understand canola pricing

Canada is a big canola producer but it’s the wider world oilseed market that bears watching

Where are canola prices going this fall?’

That’s been a common question, both this year and in years past.

Many factors from around the world combine to affect canola prices. From production science, to consumer trends, to shipping and logistics, from new product uses, government regulations and trade barriers, to commodity substitutability — all affect the marginal supply and demand of that last pound of a commodity. And, it’s at that last marginal amount where prices get determined.

Given all these factors, how much is someone willing to pay for that last bushel compared to the next bushel? So, to help answer this question, it’s good to look at similar markets around the world when making canola-pricing decisions. It’s not something you can answer by just looking out your back door, throughout your province, or even across the Prairies. You really have to look around the world at all oilseed markets to get a better sense of where our canola prices may be headed.

In the big picture, while canola is a major crop in Canada, global canola/rapeseed oil production is only about 50 per cent of soybean oil production and 40 per cent of palm oil production worldwide. When you combine all the top 10 largest oils like sunflower, palm, peanut and coconut, rapeseed oil production worldwide is about 15 per cent of the global edible oil market.

World oilseed prices.
photo: File

While Canada is the second-largest canola/rapeseed producer, it only represents about 25 per cent of global production. Even though production and growing conditions across the Prairies will affect potential canola supply and therefore domestic prices, external global production and price influences can often offset these domestic factors unless weather conditions here are really extreme.

At the end of the day, our canola represents around five per cent of this global consumable oil market, based on USDA figures.

Finally, Canada exports 90 per cent of its canola as seed, oil or meal to 50 markets around the world, so domestic consumption doesn’t have much impact on our canola prices. Again, you really do need to look around the world to get a sense of other oilseed factors impacting our prices here at home.

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To start, let’s look at a close competitor both in terms of product substitutability and proximity, the U.S. soybean market. The size alone of U.S. soybean production means it will have an impact on our canola prices. U.S. soybean oil futures have been steadily rising in the past four months, up over 30 per cent, which will certainly have helped with canola’s 12 per cent increase.

Other global oilseed prices have been supportive as well. French rapeseed futures have increased seven per cent during that time. Meanwhile, vegetable oil prices in Asia have been very strong. Chinese rapeseed oil and Malaysian palm oil futures are up around 50 per cent in the last four months.

Bottom line, nearby canola front-month futures have recently moved back up to the top end of their range of the past several years near $535/MT. Certainly, demand has been strong but at the same time, the canola crop is still expected to reach almost 20 million tonnes.

Final canola yields still remain to be seen as harvest finishes up across the Prairies, with weather-related impacts still being understood and worked into the equation. Also, as we’ve seen, other external markets are playing a part in the recent strength of canola prices.

These global vegetable oil price patterns are constantly evolving so it’s a good idea to keep an eye on those global commodities. What does that mean for canola price trends? We’ll see as more canola is combined across the Prairies over the next few weeks and actual yields are determined. Regardless, having a mix of cash sales, option strategies, futures hedges and unpriced grain is a good way to diversify your marketing decisions. This helps balance cash flow and storage while managing the downside risk but still be in a position to take advantage of any higher prices that develop.

About the author

Columnist

David Derwin is a commodity portfolio manager with PI Financial Corp. The views here are his own, presented for educational purposes, rather than as specific market advice. For a copy of the complete research study “Farming Big Data — Myths, Misperceptions & Opportunities in Agriculture Commodity Hedging” contact him at [email protected]

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