Canola catches a tail-wind, but does it have the momentum to hold on?

The recently released Statistics Canada report projected canola production to decline by 0.4 per cent to 19.4 m tonnes for 2020. Yields are expected to be up, with harvested area down.

“In terms of their estimate for production, in our opinion it’s a bit on the light side, our estimate is just shy of 20 million tonnes,” says Jon Driedger, of LeftField Commodity Research.

There’s no doubt that the canola crop looks good across most of Western Canada, but Driedger has heard about some dryness in the second half of the crop year and the word “disappointing” is floating around. He doesn’t think that LeftField’s prediction is far out in spite of these conditions, though.

The November canola futures just broke $500 for the first time in a long time — which is good news.  That being said, in spite of the StatsCan number and having a big harvest, farmer selling now because of natural seasonal pressure would be completely normal, says Driedger.

Soybeans, soybean oil, and other vegetable oils have been really strong lately which has made for a nice tail-wind for canola, and may be part of the reason for a counter-seasonal move in the markets. Getting a rally in the markets going into harvest, like the one that just happened, is a bit of  an anomaly. Another factor that could’ve contributed to it is the sustained demand for canola from the last crop year carrying forward to this year.

China is definitely an important market for Canadian canola, but moving into winter of this year, the story may need to shift to exporting to fulfill European demands. European harvest has essentially wrapped up, and the primary source of rapeseed imports comes from Ukraine — where this year, there’s a smaller crop. Australia might provide a bit of competition, but Canada has ample opportunity to fill that gap.

Storing canola might be an option to try and capture these predicted higher future prices. Driedger says there’s another element to consider — that the May futures are sitting at about $516 or $515, close to $20 in the futures market by late March or April. Basis levels are also pretty soft in the country, and if they improve between now and next spring, farmers may be able to lock in a deferred futures price and wait for basis levels to improve. That will depend on whether the farmer can store their canola, and sit on it for a while.

“There’s really a strong market incentive for farmers to try not to deliver canola at harvest, and that isn’t necessarily the market saying that canola doesn’t have any value, or the outlook’s not good, I think there’s that disconnect between the broader picture of the outlook for canola’s pretty good from a price perspective and what the market’s saying about timing and delivery,” says Driedger.

Hear the full conversation between Driedger and host Shaun Haney:

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