Canada Markets

The Dec. 19 update from Agriculture and Agri-Food Canada (AAFC) contained few surprises for the canola market but the analysis should be a wake-up call for market participants.

As expected, AAFC incorporated the Statistics Canada Dec. 5 final production estimate of 17.845 million metric tons (mmt), down from the 18.98 mmt September estimate.

The interesting part was AAFC left all the demand components unchanged other than a 186,000-metric-ton (mt) reduction in feed, waste and dockage use. The result was ending stocks falling to 1.250 mmt, the lowest since the 2012-13 crop year. That leaves the ending stocks-to-use ratio at a mere 6.43%, half of last year's 12.89%. It is worth noting that the 2021-22 ending stocks finished the year at 1.484 mmt with the price topping out over $1,200/mt.

The most concerning aspect for users should be how much the pace of use is exceeding that implied by AAFC -- and how little room there is to spare should market prices fail to discourage demand in time.

The pace of exports is the greatest concern. According to the Canadian Grain Commission's (CGC) weekly grain statistics report for week 20, exports to date have reached 4.394 mmt compared to 2.424 mmt last year. During the next 32 weeks, exports can only average 97,000 mt to remain within the 7.5-mmt estimate from AAFC. For week 20, they were back up to almost double that at 189,600 mt from 174,800 mt the week prior. After 20 weeks, exports are ahead of last year by 1.97 mmt, while AAFC only expects an annual increase of 817,000 mt. Analysts may argue that the shipments are front-loaded, but given the near-record discount to European rapeseed values and tight supplies worldwide, there is no sign of that being the case.

Domestic use is trying hard not to be outdone and is expected to set a record, according to AAFC. Crush was left unchanged from the previous estimates at 11.500 mmt, compared to 11.033 mmt last year. The problem is the pace-to-date. In the first 20 weeks, domestic use hit 4.608 mmt, according to the CGC, compared to 4.184 mmt last year. That is already 424,000 mt ahead of last year with the annual increase expected to be 467,000 mt. In short, the last 32 weeks of the year need to basically match last year's pace.

On a combined basis, total disappearance is already 2.394 mmt above last year at 20 weeks into the crop year. The AAFC ending stocks estimate is based on an annual increase of only 1.284 mmt. See the problem?

Looking further into export details, China may have already exceeded the recently reduced level suggested by the USDA. In its December update, the USDA reduced Chinese canola imports to 3 mmt from 3.4 mmt previously (5.486 mmt last year), 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 accounted for 74.8% of the total. If that pattern continued since the start of November -- and it could be assumed as such, given the need to get product shipped prior to any trade retaliation announcement -- total exports to date could already be 3.3 mmt of the 4.394 mmt shipped. This would already exceed USDA's annual projection.

It's easy to see how European countries will want to step in and take anything leftover if China is nearly done buying, given their production shortfall in 2024-25. On a combined basis, the European Union produced 2.694 mmt or 10.2% less than the prior year. As a result, the EU is forecast to increase imports by 1.393 mmt, year-over-year. Given that exports from Ukraine are expected to decline due to a lack of availability, the increase is expected to come as the result of lower exports to China. With world ending stocks expected to fall 28.8%, year-over-year, there really is no other alternative. All scenarios point to strong demand for Canadian canola.

One thing that could help the situation is found by taking a closer look at historic canola oil export data. Starting in 2021, the U.S. began taking over (from China) as the export destination of choice for canola oil, given its inclusion for renewable diesel blending credits. By 2024, China had been completely shut out of the picture with the U.S. taking nearly everything exported -- on pace for nearly 3 billion pounds of canola oil imports in 2024. Should tariffs be introduced by the incoming administration, affecting canola oil imports, China could easily take over as the primary importer again. That would leave the seed for European customers and in one development, deal with the two main bearish influences keeping money managed funds shorting canola.

Speaking of money managed funds, as of Dec. 24, they remained net short 84,580 contracts or nearly 1.7 mmt of canola according to Commitments of Traders data. With their record net-long being 70,001 contracts set in early 2022, they could be a significant buying influence should they decide to abandon their bearish bias.

It is worth noting that the soybean oil situation is similar to canola with exports running hot while the USDA estimates can hardly stay ahead of them. On Dec. 10, the USDA increased the annual export estimate to 1.1 billion pounds, almost double the previous estimate of 600 million pounds. By Dec. 30, a 23,000-mt (50.6 million-pound) flash sale announcement to India took total commitments to 1.209 billion pounds in just the first three months of the marketing year. Further higher revisions seem certain, given soybean oil's discount to palm oil prices. By early December, soybean oil was trading at a record US$220-per-mt discount to palm oil compared to a more normal premium. The spread has recently narrowed, now only an $85/mt discount, but still a discount for the first time in history. All are significant points because any rally in canola will be more difficult without an accompanying one in soybean oil.

From a technical perspective, the monthly chart (each bar representing the high/low/close of the month) still has a very interesting divergence bottom formation with the rejection of new lows in September. In that case, the price put in a new reaction low, but the Relative Strength Index (RSI) did not. The RSI is simply a mathematical formula looking at the relationship between the high, low and close to highlight market internal strength or weakness. Especially on long-term charts, a divergence bottom (or top if that was the case) is worth respecting. Another run at long-term resistance and the 25-month moving average at $665/mt looks more likely all the time.

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

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