Canola Market Under Pressure as Vegetable Oil Prices Stay Weak and Crude Continues to Fall

Canola futures have experienced a decline during the autumn season, influenced by the downward trend in crude oil and vegetable oil prices. The most recent report from Statistics Canada, which revised the production estimate by nearly a million tonnes, added to the pressure on canola prices.

The report revealed that various crops, including wheat, barley, oats, peas, and lentils, exceeded the earlier projections from September. The Canadian Grain Commission data indicated that accumulated exports by the end of week 17 were at 2.03 million tonnes, a decrease from 2.64 million the previous year. However, increased domestic use offset this deficit, reaching 3.48 million tonnes, up from 3.17 million last year.

Despite these factors, the primary challenge for canola in the autumn stems from the weakness in vegetable oil values and the crude oil market. As a significant component of canola's value, the oilseed's price tends to follow soy oil values closely. From September 1 to December 7, January canola futures experienced an 18.4 percent decline, mirroring the 18.2 percent fall in Chicago January soy oil futures during the same period. The nearby West Texas Intermediate crude oil contract also fell by 16.6 percent.

Within the soy complex, the oil component proved to be the weakest, with soybean seed falling only 5.3 percent and soy meal witnessing a two percent rise. Soybean seed found support from concerns about dry weather in central Brazil, coupled with the United States Department of Agriculture trimming its estimate of the American soybean crop in the October monthly supply and demand report. Soy meal's price received support from robust exports, with the U.S. exporting 3.38 million tonnes, marking a 25 percent increase compared to the same period the previous year.

Vegetable oil prices have been weaker than expected due to several factors. The preceding crop year saw soy oil benefiting from expectations of high targets for renewable diesel, but when the regulations were unveiled, they were lower than anticipated. Additionally, vegetable oil values are impacted by crude oil prices, which have proven weaker than forecasted as the calendar year approaches its end.

Global economic factors contribute to the challenges faced by vegetable oil prices. Strong production from non-OPEC countries is offsetting production cuts by OPEC and Russia. High interest rates implemented by central banks to control inflation are dampening demand and slowing economic growth, resulting in reduced demand for oil and other fuel. China's economic growth is also affected by specific factors within the country.

Looking ahead to 2024, a clearer picture of South American soybean production will emerge. Brazil experienced dry weather in central areas and excessive moisture in the south, leading forecasters to reduce predictions by three to four million tonnes. However, even with this adjustment, the outlook still points to a record-large crop of 160-161 million tonnes. Argentina is also expecting a strong recovery from last year's drought-affected crop.