Grain markets are notoriously unpredictable as we approach the 2018 growing season. To better understand grain prices, let’s explore the three W’s: What, Why and Where. Having a better understanding around why prices change and what factors influence them, gives us a better position to make estimates over where prices are heading.
The first layer is the ‘What’: What has been happening to the price of canola recently? The price of canola increased over $20/MT in February. Now, let’s dig a little deeper.
Why did the price of canola increase? The ‘Why’ provides key context to ‘What’ happened. In this case there key factors that triggered the increase. Dry weather in Argentina caused a spike in soybean prices, and particularly in soybean meal, providing support to the entire oilseed complex. Speculators made a large bet that grain prices would continue to decline, including canola, however, as the markets started to turn this caused them to cover those positions and start to position themselves to gain on a price increase. This provided a substantial amount of buying power. In addition, the Canadian dollar came under heavy pressure during this window, making Canola even cheaper in global markets when priced in other currencies.
We must also consider what was not included in the ‘Why’ conversation. With the canola increase, the Argentine weather was largely a ‘meal’ story, while canola prices are much more sensitive to vegoil-driven dynamics. Therefore, the gains in canola would not keep up with the pace of soybeans. Speculative buying doesn’t continue indefinitely as positions eventually swing one way until they reach a practical limitation, and then shift back in the other direction, repeating the cycle. As well, currency moves are unpredictable, and can easily work against us in the same way they can help us.
In other words, if the canola price increase is primarily driven by indirect influences from other markets, the sustainability of the increase is more vulnerable.
This drives the ever-important ‘Where’ part of the conversation: Where are prices going from here? With canola, we have seen prices ease back from their early March high. Part of this was also influenced by other markets, such as soybeans with a similar looking chart. Canola would have been more resilient if the initial increase was more about the canola market itself, and less about it’s indirect influencers. If canola’s price prospects are reliant on non-canola specific story lines, the outlook is less robust. If canola can generate some of its own reasons for prices to increase, such as a pick-up in old crop export demand, concerns about spring planting conditions, or yield threats during the growing season, then there is better potential for sustained price firmness.