Canola crushing margins excessive in Canada?

[craig]

Chuck Chuck
Do you have the same concerns when crush margins are really poor. I visited a canola crusher on Thursday and they are running 24 hours a day 7 days a week probably because of the margins. Their plant is old and needs improvement and upgrades. Good margins encourage investment just as it does encourage building more crush capacity. Crushing capacity tends to be more stable than export as there is a need to keep plants running to pay for them. Interesting it could be asked by consumers that aren't farmers making excess profits on growing canola and driving the price of food too high. If farmers think crush margins are really good then maybe they should invest in a crushing facility. They just need to remember that while they are good today they might not be in the future.

[charliep]

Actually should copy the actual question you asked
and respond.

Your question - Are the $129 crush margins
justified or excess profit in an uncompetitive
market?

Don't care. Your measures are a poor indicatior of
profibability in a crush plant. Even if true, still
won't care - profitability in the entire supply chain
is a good thing. Nothing stopping farmers from
investing with bio diesel plants using lower grade
canola likely the best alternative. Mandates are not
being met in North America.

[blackpowder]

You don't have to believe an idea or concept to understand it. And vice versa.
Most of us have a concept we don't 'get' or believe. Merry Xmas chuckchuck.

[ajl]

There is also the effect of China's
tariffs that favour the importation of
soybeans over canola seed. This has the
effect of reducing the canola price in
Canada relative to beans even though the
components (oil and meal) are more
valuable for canola.

[furrowtickler]

ajl has the right response. Also, still alot of canola still being pushed into market keeping margins high (hot harvest - warm canola needs a home). I think when this exccess canola is done the bins will stay shut and crush margins will decrease as they will have to start to buy canola in the new year. The only way this will be derailed is the E/U crashing ... so who knows .

[jdepape]

chuckChuck - afraid you can't say this isn't about the CWB - because it is.

Canola prices to farmers are pushed lower by poor cash flow from CWB grains. This is not some theory I've cooked up - it's a reality shared by many, many farmers who sell canola for cash flow - and keep selling regardless of the price. The reaction by buyers (including crushers) to this tsunami of canola coming into the system is to lower the price (widen the basis). This has nothing to do with oil and meal prices, so obviously the crush margins "benefit" from this.

Once cash flow is taken care of, farmers tend to just look at the flat price of canola. What they need to do is consider spreads more in their marketing strategies. This will come as they now have wheat to do the same with. Spreads will give incentives to sell wheat or canola - and there will be times when the arrow points to wheat, at which time canola will stay in the bin; this will help tighten up the basis (and crush margins).

Another factor is that storage rates on canola futures are not enough to "compensate" for the full opportunity cost of storing canola. Most primary elevator operators handle both wheat and canola - futures spreads are a market mechanism to pay to store grain. The mistake most people make when looking at this is to simply compare "earning the carry" in futures to earning elevations from handling canola. The full story is that the elevators also look at what they need in order to handle wheat. They compare holding canola in their elevator at full carry to CWB wheat elevations and cleaning etc.

Since the storage rates will push the spreads only so far (full carry), the rest of the carry economics equation is pushed into the basis. For example, if the Nov/Jan spread is $8.00 at full carry, an elevator operator may say that's not enough to compensate for a loss of handling CWB wheat (because his space is taken up with canola) - he may need $20 to carry inventory (and compensate for lost CWB grain earnings) and so an additional $12 goes into the basis. Large CWB elevation tariffs lead to large spreads and wider canola basis levels.

Crushers don't handle wheat but they will set their prices competitively - so their bids also widen.

If you don't believe me, talk to the crushers and ask them what they think the CWB change will do to their margins. They will say (have said) crush margins will suffer (get smaller).

Getting rid of the single desk means more competition and all the good things that come with it. Period.

[jdepape]

Forgot to mention. ICE futures has looked at this issue regarding storage rates on futures paper. We recently increased the storage rate to provide more storage incentive in the spreads to reduce the impact on basis. With the removal of the single desk and its expected impact, this will be watched carefully and further increases in storage rates on futures may not be needed.

Also - on the new wheat contract, storage rates were set at the same as the new canola rates, also to keep basis tighter.

[charliep]

For what it is worth, the below is the board crush margin published by Canadian Oilseed Processors Association every week. Highlight this is a theoretical board crush margin based on futures values and not a real crush margin based on canola purchases from farmers and oil/meal sales to customers.

[URL="http://www.copaonline.net/documents/COPAWEEKLYDECEMBER142011.pdf"]COPA[/URL]

Will note that canola is running 85 % capacity versus soybeans at 59 %.

[wilagro]

"This is a theoretical board crush margin based on futures values and not a real crush margin based on canola purchases from farmers and oil/meal sales to customers".

So what good is this if it is "theoretical"?

There was once a theory that the moon was made of "cream cheese" but that was not so.

[charliep]

Good question. I'm not the one using as performance measure so I am assuming you are asking chuckChuck.

As an economist, I use as a way of measuring the relationship between canola and product values over time. Rough estimate only because it doesn't deal with cash market values/basis levels or the differences between markets canola oil and meal are sold in. The board crush margin is not a measure of profitability.