September 23, 2011

 

Canola prices up on strong global demand

 

 

Robust global demand for canola is keeping prices high, even after two months of modest declines, according to a new report from BMO Economics.

 

While canola prices were down on 1% to average US$558 a tonne in August, that average price was about 22% higher than a year ago, said Kenrick Jordan, senior economist with BMO Capital Markets.

 

"There are some supportive factors that underpin" canola prices, Jordan said in an interview from Toronto on Wednesday. "The supplies are relatively tight and they're expected to be tight for a while. So that is going to support prices."

 

In addition, global demand for canola, especially in the developing world, is strong. Demand is good from a number of sources; emerging markets like China and so on are buying a lot of grains, oilseeds and commodities in general.

 

Another factor supporting high canola prices is the bio fuel industry, which uses canola to make biodiesel. "The bio fuel industry is expanding. Despite some potential policy changes, I think the industry is going to continue to expand,'' Jordan said.

 

Last, but not least, canola is low in saturated fats, making it a healthier alternative to some other cooking oils. "Canola oil is also considered to be a very healthy oil, which is helping to boost consumer demand in global markets," Jordan added.

 

According to the BMO report, projections from the USDA point to a tight market balance for canola, with the ratio of global stocks to consumption remaining below long-term averages through the 2011-12 crop years.

 

Stretched canola supplies, along with reduced expectations for soybean availability, should support relatively high prices through next year. Average canola prices are expected to hit US$570 in 2011 and return to US$550 in 2012.

 

In fact, experts say canola could one day dominate Prairie agriculture the same way King Wheat did in the last century. Jordan agrees the outlook for canola is golden.

 

"If you look at farm cash receipts, canola is providing a bigger share from the market than wheat is providing,'' Jordan said.

 

Canola aside, commodity prices took a tumble in August and continued to stumble into September, as the global economy veered from one crisis to another and demand for oil and gas, grains, metals and minerals faltered.

 

The BMO Capital Markets commodity price index fell 5.7% in August as global economic momentum weakened.

 

Specifically, the US and the EU zone economies slowed to a crawl and markets had to deal with persistent threats to the global economic outlook. Most commodity prices dropped due to increased risk aversion by investors and, in the case of agricultural commodities, ample supplies and heightened competition.

 

Sentiment toward commodities has not recovered so far in September. Even in the face of very high unemployment in EU and the US, the policy environment is tilting toward austerity and consumer and business confidence remain fragile.