Local canola prices are on the rise thanks to a drought in Argentina.
“I think at the root of the rise is the dry conditions in Argentina,” said FarmLink Market Analyst Michael Davey. “That started largely concerning soybean production, as they are the largest producer of soy meal in the world.” FarmLink is a Winnipeg-based company that analyzes agriculture commodity markets for producers.
Argentina is experiencing its worst drought since 2009 when the country saw a 10 per cent decrease in their Gross Domestic Product (GDP) due to a decrease in crop production. Argentina is now seeing similarly dry conditions and that is causing production forecasts for many of the country's main crops to fall. One of these crops is soybeans. As of February 2018, Soybean crop projections decreased by three million tonnes. This can be attributed to 76 per cent of the country’s crops being rated poor-to-very-poor, and 87 per cent of fields were rated dry or very dry.
Soybeans and canola are both oil-seeds and a drop in production of one increases the demand for both.
“Canola oftentimes trades at a premium to soybeans on the export market,” said Davey. “It's related, so definitely the influence is there.”
The drought affecting the price of canola, as well as the political climate surrounding the oil-seed trade. Some nations were trying to use their trade to send a message to United States President Donald Trump, after he recently announced higher trade tariffs on steel and aluminum.
“China politically looked like they wanted to throw the U.S. in the penalty box, and try and import more soybeans from South America. The export data to date shows that they had been doing that,” said Davey. “The Argentina drought situation maybe caught them offside so they might be forced to buy more soybeans from the U.S. as we roll forward.”
Although the projections are just speculative, it seems that the lowered soybean crop projections will continue to drive the price of canola up worldwide.
“What we've seen is the speculative buying come in and push the futures higher,” said Davey. So while the projections for soybean production remain low, canola will continue to have potential for future growth.
For Canadian canola producers, this has potential to boost local prices. “Absolutely there is a benefit [for Canadian producers], canola futures will try to keep pace in a rising market or a falling market,” said Davey.
Although future projections are looking good for Canadian Canola prices, analysts warn that this is not guaranteed.
“We always tend to overshoot on estimates versus the actual,” said Davey. “We need that bit of information. We don't get that until they start to harvest.”
“The latest round of calculations that we had done, based on the stocks report that came out in Western Canada would support Stats Canada's production estimates,” said Davey. Statistics Canada projects production of 21.3 million tonnes of Canola for 2018, which is nine per cent higher than last years record production of 19.6 million tonnes.
