Canola price

[dnach]

How low will the canola price go before they realize there is virtually no canola in the bin and canola acres will not be as expected. Or will there be a rally back to 425 > in Feb or March.

[melvill]

Nobody, but nobody know for certain how low prices will go. One thing we know for certain is that, in spite of the small Canadian crop, prices got too high. How do we know?

Remember there is two parts to price - supply (very low in Canada) and demand. On the demand side prices got so high that Canadian canola did too good a job of rationing a small crop. Consumers looked elsewhere for seed (or an alternate oil) whenever they could. They either found an alternative or didn't buy.

The best signal for what was happening was Canadian Grain Commission weekly surveys of canola in "commercial position", meaning the amount of canola in elevators, crushers, rail cars and terminals. At one point earlier in the winter commercial position canola rose to OVER one million tonnes roughly double the number from last year. That means seed was being delivered into the system but there were few buyers.

Now the same thing is happening to oil. One crusher told me that they "can't sell oil". What he really probably means is they can't sell oil at the price they are asking for it. So instead of lowering their asking price for oil, they're going to crush less seed.

How low does canola need to go? Low enough to attract new business from, say, a second-world or third-world buyer. Buyers have been watching soyoil prices fall since early December. They're seeing the South American bean crop doing very well (harvest has just begun there) knowing there are alternate supplies.

So, if you were a buyer of oil or oilseed what would you be doing ? . . . waiting to see if a weather scare threatens the 2003 North American crop . . . waiting as prices continue to decline or level off to a point that's low enough.

[melvill]

Eeee-gad (as my Auntie Grace would say), I'm awfully long winded!

[dnach]

Thanks for the insite. In this market of increased oil from S.A., what do you think 'all things being normal' will be a floor price into next fall. Anything below $7.5/bus and i will not grow an acre of canola. I have some $10/bus 'hear' canola contracted but I am very caucious of foreward pricing even 8-10 bus/ac because of last year. I had an opertunity to lock in $8.45/bus for sept/oct in december but without an act of good clause it is just too risky. Any sugestions or coments?

[flapjack]

What are you saying Lee. crushers and commercials bought canola(some good quality and a lot of poor quality)at some fairly good prices to the farmer, up till the usda report full well knowing they would be selling at a loss latter or is most of this hedged at a profit.Will the crushers just shut down till oil prices start coming back up

[melvill]

dnach - you first! (sounds ominous doesn't it)

I'm not certain what a bottom price would be if "all things being normal". One well known analyst sees $7.00 to $7.50/bu. under a worst-case scenario.

I really doubt if producers will be able to find an "Act of God" clause in anything but straight un-priced canola production contracts. Buyers offer priced or basis contracts because they're trying to assure themselves supplies, not because they're trying to be nice guys. I have some sympathy with your unwillingness to contract based on the 2002 experience in some parts of Alberta. However, your opportunity at $8.45 may look pretty darn good by fall. It all depends on the weather, here and elsewhere.

flapjack - it's your turn

It's important to understand that crushers and commercials are margin operators. They're not worried about whether something they bought for, say, $9.00/bu is sold later for $7 as long as they can lay off most of the price risk (hedge) in the futures market. They can't hedge basis so that's where most of their risk is. You can bet your bottom dollar that any seed sourcing they do that doesn't already have a home has been hedged.

As to the crushers shutting down, one crusher I talked to recently is really cutting back. On the day that I phoned, they had posted a spot price but it meant nothing because they weren't buying. When I said 'why' the answer was 'can't sell the oil'. Of course that means they can't sell the oil at the price they're asking.