Canada Markets

On Jan. 20, Agriculture and Agri-Food Canada (AAFC) released its first look at its 2025-26 crop year projections. The only thing for certain is the final results will be somewhat different. In the meantime, it does highlight the notion that the market has failed in its primary function of sending proper pricing signals, either encouraging or discouraging supply or demand, especially given the magnitude of the assumptions.

Grabbing your attention right out of the gate should be the idea that exports need to be cut by 2 million metric tons (mmt) from the current crop year's 7.5 mmt to maintain a mere 950,000 metric tons (mt) of ending stocks. Such a carryover might already be below pipeline levels, given the expansion of the industry and everyone needing minimum amounts of inventory.

For reference, 5.5 mmt of projected exports would be the second lowest since 2007-08, only slightly exceeding 5.245 mmt exported following the devastating drought of 2021. The record high was 11.016 mmt in 2017-18.

For such a reduction to occur, importing countries would have to find alternate sources or prices would need to be high enough to encourage the use of alternatives.

World production fell 4.173 mmt in 2024-25 from the previous year, leaving ending stocks in a precarious position -- down 3.222 mmt or 29.7% (according to USDA's January World Agricultural Supply and Demand Estimates report update). With Canada, Australia and Ukraine the only major exporters, it appears unlikely that a recovery in available global supplies can be expected in the coming crop year under such a scenario for Canada. As it is, imports of canola by China are expected to fall from 5.486 mmt in the previous crop year to just 3 mmt in 2024-25 because of a lack of supply.

The European Union has been forced to increase imports after production fell by 2.694 mmt in 20024 from the previous year. The EU is forecast to import 6.85 mmt, up from 5.457 previously. The best the world can hope for, regarding relief from there, would be for the EU to recover production enough to reduce imports. There will be no meaningful exportable supplies.

Adding to the challenge of discouraging exports is the price discount seen for Canadian canola compared to European rapeseed. It has pulled back modestly as canola values appear to have bottomed out, but with European rapeseed remaining near contract highs, the discount is still $155-160/mt CAD.

That is lower than the recent high of $210/mt, but far above a more normal range of even money to a $100/mt discount to European rapeseed.

Not surprisingly, the unsustainable pace of use has continued as a result. According to the Canadian Grain Commission's weekly grain statistics report for week 23, exports have already hit 4.925 mmt compared to 2.654 mmt at the same point last year and current annual projections of 7.5 mmt. That was thanks to another stellar week with 203,000 mt exported, up from 189,700 mt the week before and more than double the 88,800 mt average needed for the remaining 29 weeks. Domestic disappearance was not to be outdone with 214,000 mt used during the week with 5.289 mmt consumed in the first 23 weeks. The current annual projection of total domestic use is 11.942 mmt, with 11.5 mmt of that being crushed.

AAFC did assume crush would increase to 12 mmt in 2025-26, given additional capacity coming online. Considering the crush in the first 23 weeks of the current year is on pace to hit 12 mmt without new capacity being added, AAFC's projection implies price rationing will be needed there as well.

Besides the market failing to discourage exports through higher prices, it also is failing to attract acres for 2025. AAFC expects seeded area will fall to 21 million acres from 22 million acres in 2024 and the high of 23 million acres set in 2017. Given high input costs, disappointing yields and prices, increasingly variable weather and increased disease pressure thanks to tighter rotations and verticillium fungus expansion -- that might turn out to be optimistic. Unless price action helps, of course.

The yield assumption is interesting. AAFC pegged 2025 yield at 36.74 bushels per acre (bpa), up slightly from 36 bpa in 2024 but below the 38.7 bpa seen in 2023. They must be taking the challenges noted above into consideration. The interesting part is the 25-year trendline yield is increasing, running at above 41 bpa for 2025. With yields peaking in 2016, the trendline during the past nine years has been declining -- suggesting around 35 bpa for the coming year. This is something to watch.

Finally, it is worth noting that lower-than-projected ending stocks for 2024-25 would result in lower beginning stocks for 2025-26, adding to the rationing challenges. To that end, on a combined basis, total disappearance is already 2.839 mmt above last year at 23 weeks into the current crop year. The AAFC ending stocks estimate is based on an annual increase of only 1.284 mmt. The pace of use will have to slow obviously but given the fact AAFC left 2024-25 estimates unchanged at 1.25 mmt, 2025-26 beginning stocks projections may be too optimistic.

For a quick technical update -- the monthly chart 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. On the weekly chart, bottoming formations look to be holding and a test of resistance at the 100-week moving average at $670/mt looks likely. The daily chart is trying to push higher through all of the volatile news, with resistance at $640 being challenged again. Given everything affecting prices, it looks like it wants to surpass that level.

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

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