Website: www.profarmer.com
Co-owner of Pro Farmer Canada, a market analysis and advisory service for farm commodities based out of Winnipeg. Formerly employed with Continental Grain Company responsible for Risk Management and cash grain trading. Formerly employed as manager analytical unit with Growers Marketing Services, the market analysis arm of UGG. Have grown up on and still involved with family farm in Red River Valley just South of Wpg. Pro Farmer Canada’s market information, opinions and commentary can currently be found on Globalink, DTN and over the internet.
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ONE CHART WILL BE FAXED ENTITLED
"Soyoil’s Share of Product Value (1968-current)
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TEXT
Jan 4 Canada Canola Supply/Demand (000t)
Forecast Actual 5 Year
98/99 97/98 Average
Beg Stks 334 563 675
Production 7,589 6,393 5,625
Import 125 140 76
SUPPLY 8,048 7,096 6,376
Feed 575 520 391
Crush 3,150 3,239 2,417
Seed 42 39 34
Exports 3,925 2,964 2,892
Japan 1,650 1,829 1,643
Mexico 600 593 396
USA 250 391 237
Europe 0 0 550
China 1,400 110 0
Others 25 41 66
USE 7,742 6,762 5,735
End Stks 306 334 641
DEMAND FRONT LOADED
- Because canola has established a strong global demand base, we will chew through the entire crop. It's more an issue of trying to dissect where the consumption will go not what total consumption will be and even then the end result will be the same. So in saying that, one can comfortably predict that 98/99 carryout is not going to be too far off from last year’s 334,000t.
- The pace of exports have been stellar and the reason why demand is front loaded. Japan is scheduled to take 1.65MMT (roughly 0.2MMT lower than last year), Mexico 0.6MMT (same last year), US 0.25MMT and China/others just over 1.4MMT. Exports to Japan and Mexico should show a steady/lower trend due to the increased competition from Australia and Europe. The Australian crop is 1.6MMT with about 1MMT available for export.
- China has been the pleasant surprise whose imports should hit the 1.4MMT mark. Import interest is high, a function of crop problems, growing preference for seed to feed an expanding crush industry, reduced ability to import oil in part due to reduced import tariffs and crackdown of smuggling.
- All this early/aggressive export interest caught the crusher off guard. Expanding crush capacity and the competitive element (desire to maintain/expand market share) will prevent the crush from expanding, currently pegged at 3.15MMT. While crush capacity is roughly 4.25MMT (excluding Ste. Agathe), a higher than expected export commitment booked early has shrunk crush margins.
PRICING ISSUES
- Export commitments are already fixed. Crush margins will be pinched for the balance of the year as we need to maintain some type of price rationing environment. Therefore, we expect canola prices to remain relatively firmer than outside forces in the coming months.
- The problem is oilseeds are in a stock building mode, continuing to buy acreage and without production problems in South or North America in the next 6 months, the general oilseed outlook is price bearish.
- Vegoil related demand particularly from China and India is flat. Post El-Nino palmoil production is not rebounding as fast as thought but demand is softer. Sloppy meal demand, a function of poor livestock feeding margins and weak Asian demand will curtail the incentive to significantly increase bean crush, thereby preventing a large build-up in oil supplies. This means oil as a percent of product value should hover around 45% until global meal demand accelerates (See Chart).
- With demand front-loaded and users talking about a repeat of last year, buying is being done early. With ongoing deterioration of crush margins, we need to see continued "panic" from the exporters to keep prices in an uptrend. There is still another chance for a second South American weather scare and in conjunction with a need to get more seed from the farmer, prices should rally once more.
- Point of this all is that the market is expected to end with a bang, just unsure on the timing. It’s too early to put the market into a sustainable downtrend cause we can’t afford to stimulate a whole lot more consumption.
- The next best marketing opportunity rests towards late winter. But with users then having decent forward coverage, that’s likely the time to get down only to inventory that you want to hold as gambling stock, (ie for a potential weather problem). Until spring, see Nov 99 futures having good value in the $360/t area, and big resistance in the $380/t area.
- A few 99/00 observations. In twelve plus months, Asia will likely be on the rebound, rejuvenating meal demand which should increase global bean crush and push oil as a percent of product down, a negative feature for a high oil content oilseed like canola. If oil as a percent of product value were at more normal levels of 35%, canola would be a good 50-75 cts/bu lower than current prices.
- We’ll be looking at a 10% acreage increase at minimum with some talking up a 20% hike. 15 mil acres with a 24 bu/ac yield, would net a 8.2MMT crop. So the question becomes "What are we going to do with it"? Relative to this year, crush will expand, but exports will fall. It’s tough to know where exports will go as canola will price itself accordingly. If one assumes better crop prospects next year, Chinese import demand should fade. Cereals and oilseeds are at a cross-roads where in 12-18 months, cereals will be relatively better priced than oilseeds. The cumulative effect of acreage contraction should favor wheat price prospects in the coming year. So while oilseed prices are expected to fade from about April/May forward, I will leave you with one interesting thought. Last year we talked about big canola acreage and big yields and to all our surprise, look where we are now!
GregKostal