ICE Futures Canada canola futures finished 2013 at a much weaker point than where they started, with prices losing over $150 per tonne over the course of the year. Wheat, corn and soybeans in the U.S. were also down considerably, as bumper crops across North America led to burdensome supplies of the major grains and oilseeds. Where the markets head in 2014 remains to be seen, but a number of overarching issues from 2013 will play a part.
Just ahead of Christmas, the front-month canola contract was trading below $450 per tonne. A year ago, the nearby futures were closer to $600. Demand remains steady from both domestic processors and the export sector, but the supply side of the equation is completely different.
Spring wheat futures in Minneapolis, which may be the closest linked market to hard red western Canadian wheat, have lost nearly $2 per bushel over the past year. Actual Canadian prices have lost even more, as basis levels widen across the Prairies.
The largest factor, closest to home, influencing Canadian grains and oilseeds to start 2014 is the sheer size of the 2013 crop. Record production of most everything Canadian farmers grew in 2013 will limit the need to buy acres in the spring and will likely keep the supply situation burdensome through the next year as well.
Canada grew a record 18-million-tonne canola crop and 37.5 million tonnes of wheat. With four million tonnes more canola around compared to the previous year, and 10 million tonnes more wheat, there are few (if any) fundamental arguments to be made for higher prices.
Supply/demand forecasts put out by Agriculture and Agri-Food Canada (AAFC) on Dec. 20 predict that three million tonnes of canola will be left over at the end of the 2013-14 crop year — nearly five times the carry-out from the previous year. Wheat ending stocks are forecast at 11.4 million tonnes, more than double the previous year. The railways, line companies and other participants along the chain make their money off of volumes and will be doing what they can to move those crops out of the Prairies.
While there have been legitimate complaints about logistic issues moving the big crops, the system can also only handle so much. Canadian Grain Commission data, as of Dec. 15, shows Canada had exported a total of nearly 15 million tonnes of the major crops in the crop year to date. That’s about 3.5 million tonnes ahead of the pace at the same time the previous year. When all is said and done, AAFC forecasts canola exports in 2013-14 at 8.2 million tonnes, which would be a million tonnes ahead of the previous year, and wheat exports 2.5 million above the previous year, at 21.9 million tonnes.
Canadian barley, oats and pulse crops were also large in 2013, but the Canadian market does not operate in a vacuum. What about the rest of the world?
Looking beyond the borders, there is also little fundamental news to get bullish about.
The Black Sea region had better grain crops, after problems the previous year, and is creating more competition into some export markets. The U.S. also bounced back after a drought in 2012. South America is seeing good growing conditions in the early stages of the corn and soybean seasons, while there have been little weather issues out of Australia either.
From a technical standpoint, both canola and wheat were looking oversold heading into the new year and in need of a corrective bounce. However, given the overarching fundamentals, many analysts remain of the opinion that any rallies should be seen as good selling opportunities with yet more room to the downside before the lows are in place. It remains to be seen where those lows may be. Outside factors including currency exchange rates; the global economy; Chinese demand (or lack thereof); actual South American production; weather conditions; and the annual fight for acres will all come to play over the next few months and colour the markets heading through 2014.