THE PAST season saw a mixed bag for canola production in Australia. High canola price relative to wheat and barley at seeding saw a large and broad switch in planted area across Australia. Initial estimates of a bumper crop, brought about by increased area, were slowly muted by concerns regarding the dry start to the season.

Dry 2017

Predominantly, the dry areas were in Western Australia, which accounts for roughly half of Australia’s canola production, and the lion’s share of the nation’s exports, and parts of South Australia. While production conditions in the traditional canola areas in the south of WA’s grainbelt were never as dire as those in the north, market estimates were quickly downgraded, and prices pushed well above export parity.

Almost as soon as conditions normalised in WA and it became apparent its trend yields were achievable, concerns with dryness shifted to NSW. These concerns proved to be well founded, as yields ended well below trend. NSW commanded a significant premium due to this, driven by domestic demand, while prices dropped sharply across the rest of Australia.

This drop was due in part from overly pessimistic production estimates that had temporarily priced Australian canola out of its primary market, namely EU port-based crushers where Australian canola has a traditional freight advantage. These crushers increasingly sourced canola from up-country EU growers instead, who had a significantly better season than the previous year.

This combination of factors has seen Australian canola exported at the slowest pace of the past five years, despite having a reasonable export surplus. One saving grace for growers has been record or near-record oil content in many zones, with WA harvest receivals averaging around 47 per cent, and  providing a partial offset to lower base prices. Last week, ABARES increased its production estimate from 2.9 million tonnes (Mt) to a more accurate 3.66Mt for the 2017/18 marketing year, as well as revising the prior season from 4.1Mt to 4.3Mt. This now brings ABARES figures into line with most market estimates.

2018 outlook

On the international front, a polar vortex low-pressure zone is pushing exceptionally cold weather into the Baltic region, where snow cover remains patchy, and is continuing its push through to central and eastern Europe. While some crop reduction is expected and has been priced in, the effect will be largely offset by the current pricing in northern Europe which favours the crushing of soybeans over canola. Crushers with the ability to switch from canola will therefore likely do so.

In Canada, the supply-and-demand equation remains heavy, despite concerns regarding Argentina’s soybean crop. Cold conditions throughout Canada, and competition from energy exports, are affecting rail logistics from the prairies to the ports of the west coast, drying up liquidity from that market for the time being.

Currently in Australia as growers evaluate planting options, seasonally higher prices for wheat and barley relative to canola as compared with seeding time last season may result in a reversal in the area gain that occurred last year.

This will be especially so for those growers with larger forward-selling programs, however as evidenced last year, relative prices at seeding can be a poor indication of relative prices come harvest.

Source: This week’s Nidera market commentary was contributed by COFCO International Australia canola trader, Mark Carter.