Last week, Statistics Canada released their initial estimate for farmer planting intentions for the coming season. One of most high-profile figures is for canola which showed a shockingly low number of 21.38 million acres, down seven per cent from last year. This was contrary to the widespread consensus that canola plantings would be in the 23 – 24 million acre range, setting a new record. Shouldn’t that mean canola futures will spike higher in response to the news? Not necessarily. In fact, prices didn’t budge.
A few factors played into the market’s lack of response. First, traders and analysts simply don’t believe the number. Conversations throughout the winter and early spring with a wide range of farmers, seed dealers and others in the industry consistently gave the message that canola plantings will be higher in 2018. The economics and expected profitability also support this view, with projected returns for canola looking better than most other crops. In other words, all of the information leading up to the report pointed to more canola going into the ground.
Second, even if we don’t get as much canola planted as initially thought, yield will have a much larger bearing on the final production figure than seeded area. For example, the low Statistics Canada estimate projected a seven per cent drop, while most estimates were for a 2 – 5 per cent increase. Some years may see more sizeable swings, but generally speaking, the year-over-year change is relatively modest as planting intentions get constrained by factors such as good agronomic management. However, it’s not uncommon to see the average Canadian yield swing in excess of 10 per cent from one year to the next. For example, over the past six years, the change in yield averaged 17 per cent from the previous year, either higher or lower. Essentially, the weather will have a bigger impact on how much canola there will be at harvest than any likely shift in acres.
Finally, even if we see a drop in canola production, this will have a very little effect on the wider and much larger oilseed complex. A shortage of canola could help keep prices relatively stronger than for example, soybeans, but that doesn’t automatically mean that prices inevitably have to go higher.