Wheat and Canola Markets

Front-end-loaded exports, competitively-priced global supplies, and lower forward cash markets suggest weakness in canola and spring wheat prices in the weeks and months ahead.

In Canadian cash markets, the pace of farmer selling has been, and will continue to be, a key driver of price direction for wheat and canola in 2022/23. The pace of exports is the other side of that coin. The balance of these two influences from week to week will determine whether prices continue to drift lower, stabilize, or move higher.

Without some fresh news, the path of least resistance for wheat and canola cash markets is to drift lower. The story is nearly identical for both outlooks - there is a risk of exports slowing down in the last half of the marketing year, and farmers are holding unrealistic price expectations for their remaining sales.

Wheat

The pace of farmer selling is picking up for wheat currently, which will help to maintain the strong pace of exports. This in turn will stabilize the market in the short term, as evidenced by cash bids essentially equal for spot vs. April delivery windows.

Active farmer selling needs to continue to clear out 2022 harvest supplies, and for the market to reach current export forecasts. If not, ending stocks will come in higher than expectations, ahead of what is likely to be another very large wheat harvest in 2023. Relative prices are showing better returns from wheat compared to other cereal crops, and last year’s wetter weather replenished soil moisture across the Prairie growing region.

Exporters will continue to be aggressive in exporting wheat, partly to keep new facilities operating, despite historically thin trading margins. Australian wheat offers are pressuring world markets, and there is speculation that the Indian crop will also be bigger-than-expected.

The Russia-Ukraine conflict heading into the renegotiation of the Grain Corridor next month will continue to provide sparks and volatility in futures in the weeks ahead, but the reflection back in cash markets will be muted. It is hard to paint a realistic bullish scenario about a slowdown in grain export volumes from the region now that the trade has grown accustomed to conducting business amidst the conflict.

Canola

Traders report that farmer selling of canola has been light in comparison to wheat, and that price expectations are unrealistic. This year’s export program was front-end-loaded, and current offers are struggling to compete with the recently-harvested, record-large Australian crop.

In fact, there’s even a rumor that Australian canola has traded into eastern Canada. That’s incredibly bearish, if true.

Technically, canola futures are in a downtrend. Deferred contracts are steadily discounted to the nearby months.

Further down the supply chain, canola oil inventories are reported to be ample, which has slowed down buying from the crushers recently. This could reduce the volume of canola seed crushed in 2022/23 compared to current estimates. New crush capacity isn’t scheduled to come online until early 2024.

Between now and then, there are a couple of quietly developing issues, one in Europe and another in the public markets, that threaten longer-term demand for canola. First, is a new law banning the import of goods from deforested lands.

A tree is a tree - whether it’s removed from the Canadian Prairies or the Brazilian rainforest, society has determined that the planet is healthier when trees are left in the ground.

Second are the new Scope 3 emissions reporting rules being considered by the U.S. Securities Exchange Commission (SEC). These could bring into account the greenhouse gas (GHG) emissions of field crop production, and from the manufacturing of nitrogen fertilizer used.

This would have a massive impact on food companies’ ability to report progress towards corporate targets for net GHG reduction. That in turn impacts their share price, and cash flow.

Nitrous oxide emissions are 300x more potent than other GHG emissions, and it’s estimated that around half of applied nitrogen escapes from crop production systems. Canola is one of the more nitrogen-intensive crops that is grown in Canada.

So, as companies continue expanding their accounting and reporting of GHG footprints across their supply chains, and the manufacturing of fertilizer’s emissions are added to the equation, it’s questionable if canola oil will still qualify as a net-beneficial biofuel stock. By contrast, biofuel made from soybean oil would involve comparably much less nitrogen fertilizer manufacture, application, and escape from the cropping system.