Canada Markets

A Case for Larger Canola Ending Stocks

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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This chart highlights the July 31 canola ending stocks over the past 10 years and where those stocks are situated. In the eight years of higher ending stocks, the average carryout was close to split evenly between commercial and farm stocks.

There are a number of bearish signals shown in the canola market. The November canola contract ended the day down $7 per metric ton at $470/mt, while over the week, ended unchanged from the previous week's close. Despite much tighter global fundamentals, canola finished the week at a $32.49/mt discount to soybeans when the two November contracts are compared in Canadian dollars per metric ton.

The average basis on the prairies was calculated at $35.37/mt under the November for spot delivery on Thursday, after trading as narrow as $13.04/mt under the nearby future on April 19. Another sign of a growing bearish commercial sentiment is seen in the weakening futures spreads, with the Nov/Jan spread breaking chart support to finish $0.70/mt weaker at a $7.90/mt carry (January trading higher than November). Recent crop reports are showing the Alberta crop rated at 82.4% good to excellent as of July 12 and the Saskatchewan crop rated at 90% good to excellent as of July 11, although excessive moisture across various areas of the prairies will likely take a toll on the crop's potential.

Could the 2015/16 carryout be much higher than expected and be contributing to the market sentiment? The June estimate provided by AAFC suggests ending stocks for the current crop year at 1.350 million metric tons, down 972,000 mt, or 41.9%, from the 2.322 mmt carried out of 2014/15. While week 49 data shows both domestic crush and exports ahead of the cumulative pace needed to reach the 18.1 mmt demand target set by AAFC (licensed exports only), producer deliveries and commercial stocks reported for week 49 remain relatively high.

Producer deliveries of canola into the licensed system for week 49 were reported at 343,400 mt, higher than the same week last year. The four-week rolling average (week 45 through 48) is also higher than the same period in 2014/15. The five-year average for this week is 268,000 mt.

One other thing that could point to higher-than-expected stocks is the current level of commercial stocks. This volume was reported at 1.198 mmt as of week 49, or the week ending July 10, down from 1.253 mmt the previous week. Over the past five years, the average level of commercial stocks for this week was 793,380 mt.

The attached chart shows the July 31 ending stocks for the 10 years between 2005/06 and 2014/15, split into Statistics Canada's estimated farm stocks (blue bars) and commercial stocks (red bars). In the two years of tight stocks, commercial stocks accounted for a much greater share of the total stocks. In 2011/12, ending stocks totaled 707,000 mt, where commercial stocks accounted for 76.2% of the total estimated stocks. In 2012/13, ending stocks were estimated at 588,000 mt, with commercial stocks accounting for 69.4% of the total.

In the other eight years, where ending stocks exceeded a million metric tons each year to a high of 3.008 mmt in 2013/14, commercial stocks at the end of the year accounted for anywhere from 35.2% of total stocks to as high as 64.4% of total stocks, while averaging 48.3% of total ending stocks across the eight year period.

Should commercial stocks remain elevated over the balance of the crop year, historical relationships between the level of commercial stocks and farm stocks or total stocks would indicate that stocks on farm and therefore total stocks could be well above the current 1.350 mmt estimate.

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

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