Canola: Key Factors Driving Market Prices
For now, technical indicators and outside money flows are driving canola futures. In the medium term, it will be all about China. Renewable fuel standards are a wild card for canola in the long run.
As previously reported here, demand for canola oil as a renewable fuel is threatened by the potential for full lifecycle accounting requirements on the impact of fertilizer manufacturing and applications on the crop. In addition now, the Mexican government’s move to ban GMO corn has prompted concerns that Canadian canola could fall under the same policy.
While potential game-changers in the longer term, these are not the factors driving canola markets today. Macroeconomic volatility shifting investor flows, interest rate forecasts, and global politics are having spillover effects on all the major grain and oilseed futures markets currently. Fundamentals have taken a back seat.
Looking ahead over the next six months, North American grain markets are all in a similar situation. Expect prices to keep moving in tandem as long as the following remains true for canola, wheat, corn, and soybeans:
Alternative-origin harvests have come off big and they’re being sold cheap.
Supply chain capacity has improved considerably compared to last year, pressuring transportation and handling rates to historic lows.
Markets experienced corrections recently and stabilized last week.
China Demand
Technical indicators will define the sideways trading range until fresh fundamental news surfaces. The wild card is China.
Chinese politics and buying patterns are a common influence in markets currently. Consider:
News of Chinese corn purchases led the whole grains complex higher last week.
Soybean meal demand related to African Swine Fever (ASF) outbreaks is vulnerable and difficult to forecast.
China’s efforts to broker a peace proposal with Russia was a surprise outcome of the recent state visit that impacted wheat markets.
This research series is not a commodity grain outlook, it’s about new influences on land management decisions related to emerging markets for carbon removal, biodiversity, and new practice adoption. But because all of these factors impact farm economics, Chinese influences on the markets come up sometimes too.
In this report from January, China’s shifting buying from Canada to closer and lower-priced suppliers was discussed. This subsequent report went on to analyze the regional economics and political influences impacting grain markets related to the Russia-Ukraine war and China’s stance.
Demand for Canadian canola in China is solid, but it is propped up by the mandate for imports to be cleaned down to 1% dockage. According to trade sources, this mandate is the only thing keeping Australian canola out, and China is paying a premium for Canadian canola to achieve it.
Meanwhile, Australian canola is working into almost all of Canada’s other markets for canola seed. Bangladesh, Dubai, Pakistan, Japan, and even Mexico can buy at a $10-30/t discount.
Summary
The key question in determining canola’s most likely price direction from here is, do the fundamentals support an inverse? The answer is yes.
The question then becomes, what could change to move the market to a carry? The answer to this is, not much. Looking ahead, demand patterns are next set to shift back to North America in the fall of 2023. Where spot prices are at that point will depend largely on the growing season outcome, but barring a new fundamental surprise, prices in 2023/24 look set to trade flat to lower.