Canada Markets

Rationing Canola or Lacking Demand?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Canola conditions in Saskatchewan improved between late June and late July, thanks to additional moisture. However, Statistics Canada pegged the crop at 13.3 million metric tons Aug. 21, down 14.2% from last year's 15.555 mmt. (DTN photo by Elaine Shein)

DTN's Winnipeg Pit Talk column on Friday suggests that Statistics Canada's estimate of the Prairies' canola crop is too low. This debate had already started prior to the release of the Aug. 21 production report, with concerns that crop conditions have improved after the July 22 to August 3 survey period for the Statistics Canada report. For example, while Saskatchewan Agriculture has not released crop condition ratings this month, previous work has shown that the crop condition index for canola in Saskatchewan, based on the province's weekly crop condition ratings, has improved from a low of 94 points on June 29 to 104 points by mid-July and 140 points by July 27, which indicates a trend of more favorable conditions as the crop responded to late moisture.

Statistics Canada pegged the crop at 13.3 million metric tons Aug. 21, down 14.2% from last year's 15.555 mmt. Should production reach 14 mmt along with an approximate 1 mmt carry-in, total supplies for 2015/16 could be more than 3 mmt lower than each of the last two years, at a time when domestic crush is expanding.

Spreads would suggest a bigger crop than estimated by Statistics Canada as they continue to weaken, which indicate a less bullish sentiment as determined by the actions of commercial traders. The Nov 2015/July 2016 spread closed at a $2.40/mt inverse today (Nov over the July) which was $1.40/mt weaker than Friday, a bullish signal but much less so than seen in the past. This spread reached an inverse high of $18.50/mt on June 22.

Perhaps it will be the demand side that will be the issue this crop year as opposed to restricted supply? The Canadian Grain Commission's Week 2 Grain Statistics Weekly indicates year-to-date exports as of the week ending August 16 at 234,500 metric tons, down 52% from the same period last year.

As well, Canadian Oilseed Processors weekly data shows 358,930 mt crushed as of Aug. 19, down 7.9% from the same period last year despite the expanded crush potential on the prairies. Crush capacity utilization is reported at 62.6% for the week ended Aug. 19, while is 64.1% year-to-date and 80.3% in the same period last year.

Monday's Canadian Canola Board Margin Index is reported at $41.40/mt, down from $57.55/mt a week ago, $62.27/mt a month ago and $93.96/mt this time last year. While the soybean oil future pared its losses to close in the upper half of today's trading range, it reached a daily low (December contract) of 25.7 cents/lb, which is the lowest level seen on the continuous active chart since October 2006.

Basis remains one further signal that the industry lacks concern surrounding tighter supplies. Between July 2 and today, the November future fell from its high of $539.40/mt to today's close of $477.70/mt, a $61.70/mt drop. During that same period, the average cash basis on the Prairies narrowed just $3/mt to today's $20/mt under the November. Perhaps a sign of what's to come, the Vancouver cash basis weakened $1/mt today to $34/mt over the November, the first time the West Coast export basis is reported to have weakened since May 4.

It may not be evident whether the supply side or the demand side will be the limiting factor. Early signs would indicate that the commercial side is comfortable, but it is early in the crop year.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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