Canada Markets

With so many price-supportive developments leading to new contract highs being set on a daily basis recently, one has to wonder how much has already been priced in and how much more potential there might be for the rally to continue. Today's blog will try to work through some of the considerations.

Beginning at the end, the best part about technical analysis is it can provide solid numbers to work with. They are by no means set in stone, but at least they are values based on important past market behavior. In this case, the next strong resistance on the weekly canola chart (see attached) isn't found until the $820/metric ton (mt) area that prices fell sharply from back in August 2023. That decline marked confirmation of a top that was put in place the month prior at just under $855/mt. While there is no guarantee that a potential price rally would end at one of those levels, increased selling pressure would be expected should the market reach them. And one would expect bullish traders would target those areas.

That said, the $760/mt area did provide support on a few occasions between 2022 and 2023, so there could be some additional selling at that minor resistance, but it would not likely be enough to counter the bullish fundamental and technical factors at play. It may, however, inspire a short-term profit-taking pullback which would be healthy in the long run.

Getting back to the fundamentals, the most recent run was inspired by a surge in soybean oil on surprisingly positive news out of the Environmental Protection Agency (EPA) regarding proposed biomass-based diesel blending mandates for 2026 and 2027. They ended up proposing a 5.61-billion-gallon minimum requirement for 2026, with it increasing to 5.86 billion gallons for 2027. That was sharply higher than the 4.65-billion-gallon proposal that had been rumored to have been submitted to the White House for approval. It even exceeded the 5.25-billion-gallon request from an industry coalition who had originally considered asking for a mandate of 5.50 billion gallons to 5.75 billion gallons. In the end, there was such strong support from the Trump administration that they went over and above expectations.

Where it gets tricky is there are differences in how the EPA, the U.S. House and the Senate propose dealing with foreign feedstocks for biofuel production to ensure maximum support for American agriculture. There have been reports in Canada suggesting that canola will be excluded. That is misleading at best, with even the lowest level of support for canola oil still being very beneficial. At a bare minimum, if extra soybean oil is diverted to biodiesel or renewable diesel production due to favorable incentives, canola oil will be in demand to fill the resulting food and industrial use requirements. For reference, the USDA expects 13.9 billion pounds of soybean oil to be used in biofuel production and 14.0 billion pounds for food, feed and industrial use in 2025-26 -- easily substitutable between one or the other and at very substantial amounts.

At the other end of the spectrum, the House proposal provides an exemption for Canada and Mexico, leaving canola oil fully qualifying for support. Even the EPA is assuming canola oil will remain a vital part of biofuel production going forward. In 2024, imported canola oil was used in the production of 320 million gallons of biodiesel and another 390 million gallons of renewable diesel. The EPA expects 2026 and 2027 biodiesel production using canola oil will remain relatively constant at 322 million gallons with renewable diesel production dipping slightly to 385 million gallons. As such, there is plenty of demand to expect in any case.

Getting back to Canada, the unsustainable pace of use shows no sign of slowing and time is obviously running out. According to the Canadian Grain Commission (CGC) weekly grain statistics update for week 44 (ending June 8), exports have already exceeded Agriculture and Agri-Food Canada's (AAFC) recently revised export estimate of 8.5 million metric ton (mmt) (up from 7.5 mmt until May 21). With 8.682 mmt already shipped, eight weeks left in the marketing year and week 44 shipments of 158,400 metric tons as a recent example, how high will final exports end up being? Especially when shipments now could be from sales made on the March break in price, leaving no chance of discouraging them with higher prices now. Domestic use was also strong during the week at 201,600 mt, remaining on a record pace with 9.828 million metric tons used so far compared to 9.462 mmt last year. Most importantly, on a combined basis the cumulative use total is running 3.485 mmt ahead of last year while Agriculture and Agri-Food Canada (AAFC) still assumes a mere 1.423-mmt increase for the two. This leaves ending stocks of just 1.3 mmt after a very unusual negative 609,000 mt feed, waste and dockage use estimate -- counting on an upward revision to past production by Statistics Canada to correct the deficit.

Looking at the new crop, incoming supply appears at risk as well. With much of the Canadian Prairies receiving less than 40% of average precipitation during the 30-day period ending June 17, comparisons to the drought of 2021 are common. The best chance for rain this season is forecast for the coming weekend, but forecasts have had a track record of disappointment so far. Time is running out so if this event fails, yield estimates will be coming down. Even if they do produce, Manitoba looks to miss out on anything meaningful.

June 27 will mark the first realistic look at seeded area from Statistics Canada given the March estimate was based on a survey done the previous December and January. With the China tariffs being imposed on canola oil and meal imports and resulting break in price, acres are expected to struggle to match last year's level. It's unclear whether the price recovery in April was in time to keep canola in the rotation at sufficient enough levels. We shall see soon enough.

For further information on the soybean oil situation, see the recent blog pointing out why "Bullish Potential Remains Despite Recent Weakness" at https://www.dtnpf.com/….

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I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

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

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