Mecardo Analysis - Are you ok canola?
- By: "Farm Tender" News
- Cattle News
- Sep 13, 2018
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By Andrew Whitelaw | Source: CME, ASX, Mecardo.
A lot of focus in recent weeks has been on the feed market i.e. wheat and barley. There hasn’t however been much attention on Canola. On Tuesday ABARES released their updated forecasts for the looming harvest. It made for depressing reading, with NSW and Victoria expected to produce a paltry 850kmt, against an average of 1.6mmt. What about the price response?
In a drought, all crops tend to collapse, as dry conditions don’t tend to correspond to good yields regardless of what has been planted. After perusing the ABARES crop data, the canola figures stood out and warranted further discussion. The current market structure for wheat started its almost relentless rise at the beginning of July, it makes sense to use this point in time to compare the market for canola.
In Geelong and Port Kembla, the APW spot price has risen a whopping 27%, whereas in the same ports, the rise for canola has been more measured at 10%. The increase was calculated using the average of the first five days of July vs the past five days. On the canola markets in the same period, ICE has fallen 4%, with MATIF rising 3%.
The current spot price for canola is at the top end of the scale since the start of the decade (Figure 1), however, the gain has not been as strong as has been witnessed in feed grains and wheat.
The reality is however that most canola is sold close to harvest and any canola being sold will be new crop (although with limited volumes). The new crop canola price has increased 9% since the start of July to the past week (Figure 2). As would be expected, the spread between Port Kembla and Geelong has widened, with the low being a $0 spread to a high of $28.2 premium in Port Kembla.
If estimates for production by ABARES and demand by USDA are to be believed, in the coming season there will be a 63,000mt deficit of canola (Figure 3). In recent years, demand has taken a strong increase as new crush facilities come online. The conditions would, however, result in a tight balance sheet in every year since 2012.
The more lacklustre rise in canola pricing may be due to several reasons:
1) Do buyers plants have reasonable carryover stocks to provide a buffer?
2) Are oil customers able to replace with imported oils?
3) Crush plants have struggled in recent years due to the oversupply of crush capacity in Australia, are they planning for reduced throughput in the coming year?
Key points
* Wheat prices in eastern Australia have increased 27% since the start of July, whereas the rise in canola has been more reserved at 10%.
* Using ABARES and USDA forecasts there will be a NSW/VIC deficit of 63000mt.
What does this mean?
Wheat and barley have taken to the mountains, whereas canola has only ventured as high as the foothills. Although canola has not risen as sharply, the price gain can still be considered attractive.
The balance sheet for canola is going to be very tight this season, as the countries crush capacity is for the most part located in NSW & Vic. The South Australian crop will be able to provide some assistance however they are only forecast to produce 320kmt, with final yields likely to lean lower.
It must be taken into account that although the crush plants are going to be paying a higher price for canola this year, they do get to benefit from a higher price (currently $470mt) for the canola meal which is produced as a byproduct. This may prompt the ability to pay higher prices in coming months, as buyers scramble to purchase whatever scraps are available.
As a side note, there will be very few people who have not been impacted by the death of a friend or family member from suicide. Today is ‘R U ok day’, this day highlights the need to keep a close eye on those close to us throughout the year.
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