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2020 Canola Hot or Not

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Canola Sept 9-2020
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Current Canola Market Overview

  • Demand is strong

  • Canadian Supply is most likely average at best

  • Canadian Ending Stocks will be One Million Metric Tons smaller than last year (2.3MMT down to 1.28 MMT)

    • 2016/2017 Canola ending stocks = 1.38 MMT; market peaked 580 in July 2017.

  • 2016/2017 US Soybean ending stocks = 8.2 MMT about ½ of 2021 estimates. Peaked out at 10.29 in July 2017.

  • World & US Soybean ending stocks predicted to be same as last year. A neutral market.

  • US soybean market seems neutral to slightly bullish.

  • Canola seems bullish.

Knowing these things we need to evaluate where the canola market is going and more importantly a proper risk to reward strategy needs to be developed. At what price does the risk of lower prices outweigh the potential for higher prices?

Questions like:

  • What would cause the market to rally significantly in the next 12 months?

  • How volatile will the canola market be and what will the trading range be? Ie 440 to 580 or 480-525?

  • When is the market going to peak? Fall, winter, spring or summer?

All these questions are impossible to answer with certainty. However, when framed in the terms of farm management and risk to reward ratio the answer changes because the question changes This doesn’t mean things are easier; it means that the question is changed from 100% price to what makes the most sense on the farm. Factors, like the true cost of physical storage and interest suddenly come in to play. It is generally accepted that the true cost of storage is $5/mt per month to store canola. So, if you store it for 10 months the price had better be $50/mt more than it is today to make it worth your time and effort. In other words, if you can sell canola for $11 in oct then the price needs to be $12/bu in July.

Easy to prove because Cargill was paying $11.80 in April 2021 and $11.16 in November for a difference of 5 months or 64 cents. The math goes like this: $5/mt/mth x 5 mths = $25/mt = 56 cents/bushel to store canola for 5 months for Cargill on your farm in your bins. This means that Cargill is paying you 8 cents/bushel to store canola.

At this point the only reason why you don’t sell your canola today is because you think your wallet is going to be fatter later. So the question that is really being asked is, if I wait until April will the price be higher than 11.80? Let’s examine the facts and see if we can build a fatter wallet.

Marketing Insights:

The bottom line is that the Canadian canola ending stocks will be getting smaller this year. It looks like there will be similarities to the 2016 crop year but probably not to the same extreme. Let’s examine the 5 year canola chart below.

The first thing I want you to look at is the three purple lines. At roughly 538,520 and 500 and a hidden one at 483. All these lines are major support and resistance lines. In 2016, Canola spent a lot of time between 500 and 520. It went above 4 times and below once. This gives us a reference to how canola may behave this year under a similar S&D scenario. Going forward I believe that there is very strong support at the 500 level and 520 will act as a strong resistance level. Likewise, the market will probably bounce out of those technical bounds for a short time. Ignore the high of 580 because the realistic probability of hitting that is so small. However, judging from 2016 the market does have the potential to hit the 540 mark, but you’re going to have to be quick like a fox and it’s going to need some sort of trigger.

Chart - The green shaded area is the marketing year 2016/17

What are we up against?

1. We cannot assume that the canola market will repeat itself.

2. There is so much going on that effects the Ag markets in the outside of world.

3. There is a US election on Nov 3.

Where do we go from here?

From today’s vantage point it looks like canola is set up for a bullish year. There is strong demand and an average crop and the S&D points to higher prices. However, what we don’t know is how high will it go and when will it peak. More importantly how does the Canadian Farmer make his wallet getting fatter.

As harvest is progresses and wraps up, farmers must realize that they are not producers but professional speculators. The only reason why 100% of the crop is not sold the minute it hits the bin is because you think the price is going higher. Because if you were 100% confident that the price was going lower than you would sell it.

The number one thing a farmer can do right now is to evaluate the cash flow needs and capitalize on these current prices. We don’t know where this market is going and when it’s going to make a move, but we do know that at these current prices the market is in an upper range. We also know that in the last 2 plus years that market hasn’t even been close to these levels. During these opportunities it is important to capitalize on these markets and make hay while the sun shines.

These markets can be really fun, and maybe it’s the time to evaluate your risk profile and commit a percentage to pay the bills, a percentage of optimistic returns and of course keep a few loads for pure entertainment since nobody’s going to Vegas anyways.

Call to action

Figure out how much grain you need to sell to pay the bills at these current prices. Pick a time frame and sell some. It is as simple as that. Because Insight Ag Marketing has rules and $500 canola is one of them.

Why not give me a call while on the combine? Here’s the deal. Call any time or day. If I answer, I answer it is just that simple. Shoot the breeze, sell me some grain, join the Market Max, tell a joke, etc.

Anyways have great safe harvest and we will be talking soon. Thanks.

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