Mecardo Analysis - Why have canola prices fallen so far when we are in drought?
- By: "Farm Tender" News
- Cattle News
- Mar 14, 2019
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By Andrew Whitelaw | Source: ICE, Matif, Mecardo.
This article is bought to you by Mulcahy & Co Agri Solutions.
This article is bought to you by Mulcahy & Co Agri Solutions.
The canola market has lost its vigour since harvest, with declines experienced across the country. The price decline in some port zones has been upwards of 15%. In this analysis, I examine the question – In a drought impacted nation, why have canola prices declined so much?
The drought caused a huge impact on canola production which caused prices to rise in the period up to harvest. The market peaked in early October, however since then the market has declined markedly. The current price versus the high in October has declined by the following (figure 1):
Geelong -$87 (-15%)
Kwinana -$50 (-9%)
Port Kembla -$64 (-11%)
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The canola price in Australia is determined in the same way as other commodities, futures + fx + basis. In the canola market, we compare to ICE canola (Canada) and Matif (France). In figure 2 & 3, the basis for Geelong, Kwinana & Port Kembla is displayed against ICE and Matif.
As we can see in both charts, the range since the start of 2018 has been wide, moving from period of negative basis through to a highly positive basis when the drought started to hit. At the peak during the past year, the premium over both ICE and Matif was at its highest level since 2009.
We can see however that basis has remained stubbornly strong since the harvest, and although flat prices have declined, Australian farmers are still receiving strong premiums above the other major origins.
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The reason for the fall therefore is that basis has remained roughly flat, whilst the futures element has declined. It is important to remember that oilseeds are replaceable commodities, meaning that all the various oils trade around one another i.e. soybeans. There are a number of contributing reasons including the following:
1. The US-China tariff discussions have led to US soybean values declining, which has had a flow on effect onto all other oilseeds.
2. This year Canada had its second highest production year on record.
Key points
* Canola prices across the country have drastically declined from highs.
* Basis levels have remained stable throughout harvest.
* The futures levels have fallen because of high Canadian production and political impacts.
What does this mean?
It is always important to forget the flat price and reduce the price into its components of basis, fx and futures.
Due to the lack of available local supplies for Canola, it seems unlikely that basis levels will decline substantially between now and August.
There still remains plenty of negative sentiment in the market due to political maneuvering with both the US-China tariffs and the recent ban on imports into China by Canadian giant Richardson.
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