Canada Markets

Over recent weeks I have highlighted market signals which point to concern for the 2013/14 Canadian canola crop. The first is the November/January inverse, which is a bullish sign derived from commercial activity. This spread closed at $2.40 per metric tonne in today's trade, below its January high of $4.20/mt, but remains bullish just the same.

The second indication is the aggressive basis levels seen in the cash market. While single-digit basis levels have been available throughout Alberta and western Saskatchewan for new-crop deliveries, the average Prairies-wide basis level at the end of last week, based on available data, was $15.31 under the November for October delivery. This is a historically aggressive basis and has narrowed more than $2/mt since January.

The attached yield-acreage matrix is based on the following assumptions:

-- beginning stocks for 2013/14 are 350,000 mt which are based on Agriculture and Agri-Food Canada's (AAFC) projected 2012/13 carryout;

-- while the harvested-to-planted percentage was 98.5% in 2012/13 and the current forecast is at 98.26% for 2013/14, I've chosen the five-year average of 98.06%;

-- imports to remain steady at 125,000 mt;

-- export demand to remain consistent with AAFC's forecast at 8.2 million metric tonnes with domestic demand to equal 7.175 mmt, also projected by AAFC.

The range of yields chosen include the poorest average Canadian yield in the last 20 years, which was 21.8 bu./acre in 1995, along with the highest average yield in the past 20 years, which was 35.3 bu./acre in 2009. Note that last year's average yield was 27.7 bu./acre.

Given the assumptions made, less than 15% of the acreage-yield combinations, as indicated by the yellow shaded area of the chart, result in a positive carryout for the 2013/14 crop year. Combinations of acreage and yield falling outside of this shaded area would rely on further rationing of exports and domestic crush throughout the 2013/14 crop year.

The situation becomes more alarming when one considers forecasts in the industry which involve a 7 to 10% reduction in canola acres in 2013/14, as compared to the 1.3% drop which is forecast by AAFC. Given the assumptions made on this chart, a 7% reduction in acres to 20 million acres from last year's 21.5 ma, would require a 34 bu./acre average yield, or a 22.7% yield improvement from last growing season, before a positive carry-out is reached, resulting in an extremely tight 223,106 mt carryover.

Given the potential for increased demand with more plant capacity to be added on the Prairies this year combined with the possibility of lower acres, watch for further movements in both the Nov./Jan. futures spread and tightening of cash basis as a sign of growing concerns in the trade.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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