Canola prices have been ‘a pleasant surprise,’ says analyst

Production issues here and abroad, Chinese demand, and speculators have all played a role in rally

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There are several factors behind the rally in canola prices, says provincial crop analyst Neil Blue.

On the supply side, lower production of palm oil began to support those prices back in the spring, he said, adding the primary driver of canola prices are the vegetable oil markets, of which palm oil is the largest in volume.

Crop conditions in North America have also played a role, he said.

“Hot weather during canola flowering was followed by dryness in much of Saskatchewan on the Canadian Prairies. Then in mid-August, adverse weather affected production in the major U.S. soybean producing states. Although the canola and soybean crops are still expected to be large, expected yields have been trimmed.”

On the demand side, China has booked much higher soybean purchases from the U.S. than a year ago, said Blue.

“Part of this demand is thought to be due to the recovery in China’s hog population after millions of hogs were lost there to African swine fever,” he said. “Canadian canola exports six weeks into the crop year are 30 per cent higher than last year at this time. Canola crushing so far is similar to last year’s strong pace.”

Then there’s the influence of speculative funds trying to profit from price moves.

“Some speculative trading in the futures and options market is a good thing as that trading activity adds trading volume, which helps hedgers to more easily enter and exit the market,” said Blue.

“Each week in the U.S., the Commodity Futures Trading Commission gathers and releases information on what groups hold positions in each commodity futures. The speculative funds had been in a sell position on canola and soybean futures.

“As prices began to rise on changes in expected production and strong U.S. soybean sales to China, the spec funds began to buy, first offsetting their sell position and then moving to a buy position. This enhanced the price rise.”

Now that harvest is underway, some farmers are taking advantage of the higher prices by selling newly harvested crop.

“That selling by producers is suppressing a continued price rally for now. There is still plenty of uncertainty in the market. Actual soybean and canola production will not be known for a few weeks yet. Continuation by China in buying large amounts of U.S. soybeans is uncertain. South America is expected to produce a record soybean crop. If weather in South America supports large crop production there, that crop will become available to export early in 2021 and into next summer.”

So producers should strike while the iron is hot, he said.

“Pricing some canola during harvest at from $11 to $12 a bushel for near-term and deferred delivery is a pleasant market surprise to take advantage of,” he said.

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