Canola Outlook: Slightly Bearish for Now
Canola futures recently hit multi-month highs as domestic supplies tightened ahead of harvest. Exports finished the 2019/20 year strong, and the volume crushed was a record. We are still waiting on official July export and crush data, but we finished 2019/20 with tighter stocks than what we started with. The strength in futures recently let us move any 2019 canola that was not previously sold and allowed producers to catch up to our 45 percent sold position for the 2020 crop. The market moved into the upper end of our expectations for Canola futures.
Our current view: Slightly bearish for the short run
Futures have trended lower for a few days and recently hit below the $490 mark. There is not a clear seasonal decline in cash prices that we see each year during a specific time period. But, our view for now has shifted from slightly bullish to slightly bearish. With a large U.S. soybean crop and harvest for Canada about to start, we could lose some value in futures from the recent highs we hit. We are confident, though, that strength will return to the market a few months down the road.
So...why are we optimistic?
There are several reasons why we are optimistic about higher prices later in the crop year.
The EU crop is short again; we think a record/near record import program is on the way.
Ukraine’s harvest is nearly complete with reported yields running 14% lower than last year.
In 2019, Ukraine had a record harvest and export program, helping offset the EU 2019 crop.
China and Ukraine have been working on canola oil trade, which could limit shipments to the EU.
Canada’s beginning stocks are much lower than a year ago.
Assuming lower crush and exports for Canada, we still expect stocks to constrict in 2020.
The ”bearish” inputs that are present:
Canadian crop size; Statistics Canada will be out later this month but that forecast will probably be revised to the upside later in the year.
Australian production is expected to rebound and exports could be up.
Reports that EU imports will be slower due to COVID-19 lockdowns.
The bearish inputs mentioned above are already known. Statistics Canada normally does find canola later in the crop year. Australian production likely will rebound after two years of drought, but the country only produces 2-4 million tonnes of rapeseed most years with exports hitting around 2.5-3 million tonnes. Right now, what we expect is for the increase in Australian production and exports to essentially offset the declines for Ukraine. A slowdown of EU imports has been noticed for the start of the crop year but a few weeks does not make a pattern. The EU will need a large volume of imports again in 2020.
FBN's take on what this means for the farmer
We suggest holding onto canola for now in anticipation that prices will rise later in the crop year. A word of caution: The 2021 outlook will probably not be as attractive as the situation today on the assumption the EU will not have a third consecutive year of production problems. That means that when we issue 2021 recommendations, producers should act even if the recommendations are issued earlier than normal.
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