Canada Markets

A Case for Large Canola Stocks

By Cliff Jamieson , Canadian Grains Analyst
A well-supplied global vegetable oil market and seemingly ample supplies of canola has led to a $1/mt weakening in the Vancouver cash basis on Tuesday, reported at $25 over the March future. This chart shows the cash basis relative to the nearby contract over the past two crop years. (DTN graphic by Nick Scalise)

Over the last short while, we've noted trade comments suggesting that canola production may be nowhere near the 17.2 million metric tons as reported by Statistics Canada in December. D'Arce McMillan of The Western Producer expanded on this in recent days in his piece Who's Right, Who's Not on canola ending stocks.

With Thursday's Dec. 31 stocks report by Statistics Canada drawing near, a huge gap in opinions exists when taking into account that the average pre-report production estimate was 15.5 mmt in December as compared to the 17.2 mmt reported by Statistics Canada.

It seems that the market may be leaning to the higher-end of this range of production, given that the market continues to experience a record pace of demand combined with weakening futures spreads and export basis, while futures are holding near the lower-end of their recent ranges. This is a sign that the commercial trade is comfortable with available supplies.

AAFC's estimates for demand, both exports and domestic crush are set at record levels, while actual demand is close to being on track to achieve those targets, as of the most recent CGC and COPA statistics. Cumulative licensed exports as of week 25 or the week ending Jan. 24 are reported at 4.66 mmt, 17.4% above the same period last year and 19.6% above the five-year average. The most recent export data shows the current pace to be close to 90,000 mt ahead of the steady pace needed to reach the current 9.5 mmt export target set by AAFC.

As well, the most recent COPA crush data shows the cumulative crush for 2015/16 at 3.956 mmt as of January 27, 11.9% ahead of last year and roughly 19.5% above the five-year average. This level of crush is roughly 144,300 mt behind the cumulative pace needed to reach the current 8.2 mmt target set by AAFC. Combine the two and the industry is roughly 54,000 behind the pace needed to meet this demand target, while unlicensed exports to the U.S. will help narrow the gap.

While demand has remained robust through the first half of the crop year, there are signals pointing to a comfort level with available stocks. As seen in the attached chart, ICE Futures Canada reported Vancouver cash basis to weaken $1/metric ton on Tuesday to $25 over the nearby March contract. While not shown, this is the weakest we've seen this basis trade since January 2014.

As well, futures spreads are indicating a growing bearishness. The nearby March/May spread reached its narrowest point in recent trade on Dec. 29 at minus $4.10/mt (May over the March contract) while recently reaching a bearish $9.60/mt carry which has since narrowed to minus $9.40/mt. The May/July spread reached its recent narrowest point on Dec. 30 at minus $1.30, while is now trading at minus $6/mt. A snapshot in time shows this spread at roughly 53% of commercial carry, which could be viewed as a neutral stance taken by commercial traders later in the crop year.

Meanwhile, canola continues to pour in to the system. Cumulative producer deliveries into licensed facilities as of week 25 or Jan. 24 are reported at 8.752 mmt, up 917,400 mt or 11.7% from the same week in 2014/15. A slowing in weekly volumes delivered is noted in the past three weeks although could increase with February contracts now due.

Simply put, it's hard to imagine this bearish commercial activity if a million tons of production (or more) was removed from the balance sheet.

Thursday's Statistics Canada report will be released at 7:30 AM CT.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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