Canada Markets

Money managers appear reluctant to abandon their heavily net short positions in ICE canola futures, according to Friday's update from the CFTC through its weekly Commitments of Traders (COT) report -- regardless of any bullish fundamentals. They seem focused on trade risks related to China and the U.S., while ignoring the unsustainable pace of demand.

As of Dec. 10, they remained 107,440 contracts or 2.15 million metric tons (mmt) net short after buying back only 8,629 contracts during the week leading up to it. Considering the March contract rallied over $40/metric ton (mt) following the Dec. 5 bullish Statistics Canada final production report, this was a surprisingly small amount of short-covering. One explanation is that they may have been heavy sellers on the Wednesday prior to the report, then covered a larger number of contracts afterward. Or they just didn't think they needed to reduce their positions aggressively.

At 107,440 contracts net short, they were surprisingly close to their record net-short of 154,165 contracts set in March 2024. That position represents 36.6% of the total open interest in ICE canola futures, a very significant level if they decide to cover. It is worth noting that prices turned down from resistance on the bounce and have declined $16/mt since Dec. 10, with additional money manager selling likely responsible.

Looking at the fundamentals, the pace of exports is the greatest concern. According to the Canadian Grain Commission (CGC) weekly grain statistics report for week 18, exports to date have reached 4.029 mmt compared to 2.144 mmt last year. Over the next 34 weeks, exports can only average 80,000 mt per week to remain within the latest USDA estimate of 6.75 mmt (revised down from their previous estimate of 7.35 mmt). To remain within the 7.5 mmt estimate from Agriculture and Agri-Food Canada (AAFC), weekly exports cannot exceed 102,090 mt. For week 18, they remained at 140,200 mt compared to 193,400 mt the week prior.

That brings us back to the accompanying chart. With canola trading at a record discount to European rapeseed, it's hard to imagine exports being discouraged sufficiently -- regardless of further Chinese purchases.

In its latest update, USDA reduced Chinese canola imports to 3 mmt from 3.4 mmt previously, citing reduced availability of Canadian supplies. According to Canadian International Merchandise Trade data from Statistics Canada, canola exports to China in the first three months of the marketing year totaled 2.154 mmt out of a total 2.881 mmt. If that 74.8% continued since the start of November -- and it could be assumed, given the need to ship product before any trade retaliation announcement -- total shipments to date could already be 3 mmt of the 4.029 mmt shipped. Taking us back again to how important the record discount to European rapeseed could be in ensuring other customers step up if China does indeed back away.

While there is nothing new on the "Chinese anti-dumping investigation into canola" front, it's clear they are allowing time to stock the shelves ahead of any potential trade disruption -- especially necessary given the tight palm oil supplies and related price increase.

On the domestic front, AAFC is set to update their estimates on Dec. 19, reflecting reduced production as reported by Statistics Canada and revised demand projections. With domestic use as of week 18 totaling 4.171 mmt compared to 3.713 mmt last year, a change in that area is highly unlikely. If anything, it could be argued that domestic use will have to rise from AAFC's current estimate of 12.128 mmt compared to 11.894 mmt last year. With domestic use 458,000 mt ahead of last year in just the first 18 weeks, an annual increase of 234,000 mt seems conservative.

The soybean oil situation is similar to canola, with exports running hot while USDA estimates can barely stay ahead of them. On Dec. 10, USDA increased the annual export estimate to 1.1 billion pounds, almost double the previous estimate of 600 million pounds. By Dec. 12, another strong week of export sales took total commitments to 1.056 billion pounds in just the first nine weeks. Further higher revisions seem almost certain, given soybean oil's discount to palm oil prices. By early December, soybean oil was trading at a record $220 USD per mt discount to palm oil, compared to a more normal premium of that amount. It's worth noting that when soybean oil exports hit a 25-year high of 3.359 billion pounds in 2009-10, soybean oil was worth $250-300 USD/mt more than palm oil. A significant point given any rally in canola will be more difficult without an accompanying one in soybean oil

So, what will it take to get money managers to abandon their pessimistic outlook and start covering their short positions? Likely clarity on the new administration's support for the renewable diesel industry and related imports of canola oil. Clarity on how potential tariffs could be applied to canola oil, who would ultimately be responsible for paying them, what that would do to demand and the Chinese anti-dumping investigation results. A realization that canola oil could flow to China if anti-dumping tariffs prevent seed shipments -- especially if canola oil flow to the U.S. is disrupted by policy changes there -- may become a factor as well. Time will tell, and rest assured we'll be on the lookout.

With that, keep in mind I'm always happy to get feedback along with any suggestions for future blogs.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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