The conflict in the Middle East continues to drive volatility in oil markets, and last week it added some impetus for higher canola prices. Early this week however, we’ve seen prices decline, but the fundamentals of tighter supply remain.
Fuel prices have been on the rise at the bowser, driven by a return to hostilities in Iran. It’s supposed to take a month or more for oil price rises to flow through to the bowser, but it seems it only took a week or two this time.
Figure 1 shows that there may be a limit to price rise, with crude oil falling heavily on Monday, and prices never reaching the highs of April and May. Grain growers will be hoping to see crude back under $80US/barrel by harvest, as they’ve already copped it with peak prices hitting during sowing.
Since bottoming out in January, canola prices have been trending upwards as conditions in Canada are just ok, and heatwaves in Europe impact yields. The recent rally in canola prices was assisted by rising oil prices, and Monday’s price decline was seemingly in response to the crude decline.
The good news for growers is that locally canola has followed Matif and ICE futures higher, with port prices moving past $800/t last week. Local canola values are now back at or above the peaks of last spring and are attractive relative to the last three years.
Canola basis to Matif remains wide on the east coast but has narrowed from the $100 plus we saw last year. Canola at Geelong sits around $80 below Matif but it’s unlikely that’s because of strong selling here. In the west conventional canola values are close to Matif prices, with the freight advantage perhaps more pronounced now that shipping rates are in flux.
It would be a brave canola producer to lock in physical prices with the three-month rainfall outlook released last week (figure 3). With just a 20% chance of rainfall exceeding median in the spring, and a better than 80% chance of maximum temperatures exceeding median canola may struggle to finish.
What does it mean?
The weather forecasts are a recipe for canola basis to improve, so locking in physical isn’t preferable, regardless of production risk. Using swaps or futures helps negate some production risk, and with basis downside likely limited, would be the way to take advantage or stronger prices.
Key Points
- Canola prices had been rising previously but got a boost from crude oil prices.
- East coast canola prices remain well below Matif.
- Forecast rainfall and heat probabilities don’t encourage forward selling of canola.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: Bloomberg, Bureau of Meteorology, Mecardo
