Canola Numbers and Prices

[Kasro]

I am trying to analyze the canola situation to attempt to ascertain what I should do with my canola stocks, and decide on pricing for 03. I know that world oil prices are a big part of the picture, but the canola fundamentals do have a bearing.

Here is my figuring:

Carry in1.2MMT
Prod’n3.5MMT
Imports 0.1MMT
Supply 4.8MMT
Exports/Crush to date 1.6MMT
Visible stocks1.1MMT
Est ‘03 Carry out0.5MMT
left on farm 1.5MMT??

According to this math, farmers have delivered 75% of what they grew in 02, only 35% of the way through the crop year. Does anyone think this is the case? If it is, deliveries will have to slow considerably. Or have farmers told Stats Canada a big lie, and will in the end deliver 4.5 MMT of a 3.5 MMT crop?

What does all this mean for prices? For crush? For exports?

[charliep]

I believe the production estimate with at least some thinking it is actually a little lower. The more important issue in my mind is quality with the Japanese only willing to take 1 and 2 (no 3 or sample).

1) A lot of what you are seeing is the fact buyers want physical ownership of canola (won't sell something they don't have). They bought a lot of last years canola carryover this summer and are currently sitting (week 18) with 1.15 MMT in commercial storage (almost double last years 624,000t). Old crop will be mostly good quality while a lot of the new deliveries will be 3 and sample (at least in the west).

2) Deliveries are sitting at 1.9 MMT, down just slightly from last year. Old crop deliveries, contracts and forced deliveries of tough/damp (farmers with no driers) have kept canola moving into the system. Actually, not to far from normal. It still just 40 % of supplies. Again, knowing what quality is sitting in the bin is key.

3) Exporters/crushers have known the supply situation for a long time so they have been organizing their sales program/business with this in mind. Exports during the first 18 weeks of the crop year have amounted to about 700,000t, down from 1.1 MMT during the same period last year (64 %). The grain industry will be looking after the Japanese market only (35,000 to 40,000 t/week). The issue in this case is quality - not quantity. Crush has been 850,000 t, down from 980,000 in 2001. Again will target for maintaining 40,000 t/week as long as they can (maintain oil and meal customers) but will shut down when they run out of seed. Will buy 3 and samples so another advantage (expensive to clean green out of oil but current premiums warrant it).

4) I keep hearing (west at least) of the high green counts with the only market feed. Comments? Quality again is as important as quantity?

Lots of numbers but end result (under this scenario) is a carryover in the 400,000 to 500,000 t range. Your only hope of pushing prices above recent highs is higher international/US vegetable oil prices (maybe) or someone in the trade that shorts the market.

I think canola (1 Canada/Alberta (will hold in the $9.50 to $10.50/bu range or most of the next winter. Weather in South America (mostly good to date) and next spring will be keys. I would sell upper end/buy calls on price dips if I were optimistic about prices.

New crop generic canola in the $8 to $8.50/bu range should also likely be sold if you are a disciplined hedger. Owning some calls (maybe beanoil) is an insurance policy in case prices take off.

Others thoughts.

[rain]

Charlie why are you only looking at $374 (8.50 bushel)for next years canola? The last two years in the Calgary region you have been able to -5 to 5 basis delivered.

Do you not think new crop inversions for canola wheat and barley will go to carry?

We now know supply and demand is the last piece of the puzzle. I am ignoring what was sold last year at this time for canola, in my mind it means nothing. Current sales to this years supplies and getting us under 500,000 carryout implies to me producers should raise the bar. Dry conditions mean a lot as well.

[Kasro]

Charlie, what were on farm stocks at the end of July? I want to get a handle on how much farm inventory has been delivered to date, and therefore how much is left. I'm thinking farmers only have about 1.5MMT left on farm.

There are 2 things I am thinking about. First, I want to know how much is left in the farmers hands, as I suspect the remaing stocks are being held by much stronger hands that what has been delivered until now.

And second, this is seasonally a weak time of the year for canola prices. And I believe, relative to soyoil, that canola has become underpriced. As long as oil doesn't drop in the new year (world fundamentals don't support a drop in oil prices), then canola has a better that 60% chance of a rally between now and end of January. After that acreage and weather will again enter the equation.....both unknown at this time.

Accordingly, my thinking is that now is not a good time to be pricing/selling canola. A $30 rally from here would get me interested again. $40 will trigger some sales. My nearby basis levels stink at -$25 to -$35. Deferreds are better at around -$10. I have locked in some deferreds.

[charliep]

The Canadian canola supply demand (historical and Charlie's forecast for 02/03) is located at:

http://www.agric.gov.ab.ca/economic/stats/canadian_canola.html

Farm stocks of canola on July 31/02 were 590,000 t, half of the total carryover.

My advice for old crop canola (on the caveats that your canola is relatively dry/storeable, you are not at the end of a 90 unpriced contract/Jan. basis and nearby cash flow needs are met) is to relax (always keep one ear open) and enjoy the holidays - marketing canola can wait till the new year. Further, canola is one crop I don't mind advising storing (keeping in mind my caveats).

I don't know if I have answers to your questions Rain. With Calgary basis levels, a person could have got closer to $8.75/bu on regular canola. My thinking based more on being a disciplined pricer of product with $8.50 to $9/bu (depending on location) a good place to get started on the first 10 % of expected 2003 production.

Rain - Will 2003 new crop canola and barley futures move from an inverse to carry? Don't know so will leave for discussion. As a note of curiosity, are you suggesting this as a trade (sell old crop/buy new)? Would have to have a major discussion about risk with a client before suggesting this.

[TOM4CWB]

Charlie;

It looks like much of the low quality Canola in the drought area has moved into the system to satisfy hedged deliveries done that were pre priced.

This means that a higher % of good quality Canola remains than would first appear.

Also many producers are going to store higher green seed and blend it out with the next few years production... a little at a time... not a bad way to pick up 3-4 dollars a bushel(If the Canola is good and dry).

These are a few comments I have heard in the meetings I have attended over that last few weeks!

[rain]

Charlie I was not recommenting selling old crop futures and buying new crop futures as a trade. More that barley and canola stocks will be tight going into the new year. Supply in canada and the states is pretty well known now. Cash values for both are poor or at least inline to demand. I am thinking more in line that now that supply is known we need to monitor demand and that we need to stretch the supply into November and I feel the inverse of $20.00 for barley and $50.00 on canola is a little wide.

[TOM4CWB]

Rain;

The spread is only too wide if the fall 03 bean oil and corn dictates it does not match.

One blip in the weather towards a dry South American crop... and this market will be on fire! The world is counting on a 50mmt Brazilian crop of beans... a big expectation!

With all the dry weather and harvest problems (Rutts, spring harvesting)on the Canadian prairies we will be hard pressed to bring in an average crop next year... let alone above average.

It would be a big surprise if these markets are NOT extremely volitile over the next 8 months.

[charliep]

Rain

Just being a bit off the wall/pushing thinking. Having said, if a farmer is forced to sell now or wants to replace fall sales, looking at Nov. 2003 may be a strategy. The question that will drive this decision is if a person is optimistic about prices, why? Tight supplies end of crop year? Continued weather problems/another small canola crop 2003? This will help pick the month.

My concerns about a spread in futures is someone in the trade shorting the market this summer (cash market)/old crop futures going wild as some people hold for delivery. Otherwise this spread might work - not for faint of heart/those lacking fat wallets.

[Kasro]

It looks like the most important canola "number" MAY have turned a corner yesterday. After filling a gap, the market moved $4 higher, and then again $6 higher today, even in the face of slightly lower soyoil. Talk Vancouver may begin shipping in January may have helped, although I wouldn't be surprised to see Vancouver closed until new crop. (Unions finally getting what they deserve)

IF rumors of export business other than Japan ever comes to be true, depending on the size the sale(s), it could be explosive for futures. Greed on the part of buyers could have the same (but reverse) effect on prices as greed on the part of farmers. Instead of buying on the way down, they scramble to cover on the way up, and.........

So, after what looks like a really overdone price break, have we found bottom?