How to Market Canola Right Now
The production of canola tends to be so easy, that by contrast, marketing it can seem really hard. Even at historically high price levels, the pressure to ‘get it right’ is intense.
Canola is King
In western Canada, canola drives success for modern commercial grain farms. Productivity, profitability, and acres have steadily increased in recent decades, on the heels of modern seed and crop protection offerings from life sciences companies.
With the tools of modern farming, growing a crop of canola has become almost bulletproof, with little in the way of finesse or strategic action required by the producer. Marketing the crop, on the other hand, is in the sole control of its owner, and this can be scary.
There’s been some great advice about grain marketing showing up in Nick Horob’s Twitter feed lately, based on the benefits of tracking farm financial data alongside prices to optimize overall returns. Even still, market volatility makes emotions run high, and at some point, decisions have to be made to pull the trigger.
How to Decide
As was reported here last spring, barring a major weather problem somewhere in the global oilseed complex, canola futures were on the decline for 2023. A weather rally did pop the market higher in June, related to dryness across North America and in much of the western Canadian growing region.
As they tend to do, that rally faded into harvest, which is currently nearing completion. And canola yields once again surprised farmers and traders to the upside, thanks to the genetic modification of modern varieties and superior resiliency to poor weather conditions.
Research indicates that the hardest emotions to deal with in grain marketing are related to loss aversion, for example:
Fear of selling into a weather rally when the crop is believed to be at risk, or
Regret for not having sold enough when harvest pressure pulls the market lower.
These emotions really mess with a commodity marketer’s mindset… and can cause panic selling at the lows.
Right now, it might be tempting to sell more canola before the market drops further, just to alleviate that fear that prices will keep falling forever. Of course, they won’t – markets are cyclical.
This central tenet of commodity market economics is what enables good grain marketers to deploy discipline and technical analysis to devise better, and unemotional strategies. Discipline means having sales in place to cover the farm’s storage and cash flow requirements to avoid selling grain during the harvest market lows.
Technical analysis of the January 2024 futures chart, shown below, suggests the following:
The current trajectory for canola futures is lower;
There is decent support at the $700/mt level; and
The peak-to-peak window for the market to return back up to resistance is about six weeks;
Putting it All Together, into a Plan
The final step in planning a farm’s canola marketing strategy for the weeks and months ahead is to look at the fundamentals. At this beginning stage of the crop year, data on total supplies and export demand are so scant and uncertain that it’s best just to ignore them.
Basis levels are a more reliable indicator of short-term cash market stability during harvest, because the crush plants are a significant buyer and margins are currently said to be strong. A steady basis during harvest is an indication that commercial demand will be consistent through the fall and early winter.
Thus, the forecast for canola prices is range-bound until some new information comes along to break the market higher or lower. In other words, since it looks like the market will bottom soon and turn higher, panic selling would be a mistake today.
All things being equal, it looks like there will be another opportunity to add to sales back up in the $800/t area in the next couple of months. Provided cash flow needs have been managed, there is no need for further marketing of canola today.
Conclusion
With that taken care of, canola industry participants are advised to consider the following new macroeconomic bearish headwinds on the horizon:
Rising interest rates;
Marketers ignore long-term market headwinds to their peril. Short-term risk management can be organized and planned, and must be right now, to make space to consider canola business repositioning.