Key Points –

• Canola prices have stabilised in the $475—$485/t range at Pt Ade- laide since mid September.
• Basis levels are now improving.
• Canola prices still look too cheap relative to ICE and Matif (EU) futures, and relative to wheat.
• Plan to sell 50% of unsold canola during harvest and delaying the rest.

Canola Futures

Canola futures have held up reasonably well in CAN$ terms since our last report on September 30. We are getting past peak harvest pressure in Canada, although we did have a rain delay to slow farmer selling.

We are now facing harvest pressure on oilseeds from the US har- vest, and also from the prospects for the next South American soy- bean crop that will be planted soon.

The view of Alan Tracy from the US Wheat Associated at a GGA meeting in Birchip last week was that the US soybean crop will be smaller than currently being projected, and as such, all oilseed prices are likely to get support, particularly once that harvest is finished.

Canola Basis

New season canola prices have been showing weak basis levels. As a rule of thumb, we should expect basis to be close to zero against

November ICE futures. ie our cash prices should be close, to, or even slightly above, the A$ value of Nov futures. However, our forward market has had a negative basis since May, and did get as low as -$25 per tonne.

Fortunately basis has improved in recent days and at Pt Adelaide was back to -$14 per tonne on Wednesday this week. It has im- proved for a couple of reasons

1. Canadian futures have been hit hard by grower selling after the harvest midpoint.
2. That has allowed EU futures to open up a premium to Canadian futures (after adjusting for currency). Our prices have probably followed the EU price base.
3. Returns into China are relatively strong and any sales made there will allow the possibility for improved basis relative to Winnipeg canola futures.
4. Harvest and early post harvest shipping programs will require the trade to buy canola when growers may be reluctant sellers at the second lowest prices since 2005.

Selling Strategies

Canola looks too cheap to be sold at the moment.
continue to improve, and base oilseed prices might improve if the US Wheat Associates CEO is correct.

Unless we get a clear signal, plan to stand aside until you actually begin harvesting canola. Then plan to sell 50% of your unsold cano- la during the harvest period (if the market is falling, sell for cash be- fore filling any contracts – be wary of contracts if you sell to those same people – some of them take first deliveries and allocate them to contracts regardless of what you might intend).

Plan to hold the second 50% for later sale (probably all sold by late March, but could be any time from December onwards).

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Key Points –

• The sell off in canola has stalled, with a CAN$5.90/t recovery from the low set during last week.
• In A$ terms the market has lifted A$10.93/t from its low, with a downward correction in our dollar helping.
• Australian cash prices have responded with up to a 12/t lift in prices, to $487/t Port Adelaide.

Canola Futures

The market has given us a breather from the recent downward price trend. The market bottomed out on September 24 our time with a closing price of CAN$478.10/t from trading the night before. Since then we have seen $10 per tonne added to the Pt Adelaide price, with A$6.15/t being from canola futures, and A$4.78/t from currency. A small drop in basis of $0.93/t them gives us the $10 per tonne lift in our contract prices since then.

Is this recent lift in price a sales opportunity for those who have not sold a lot of canola yet? Possibly. Tonight we will have the USDA Quarterly Stocks Report released. Some see this as a market mover, but the reality for soybeans is that with harvest pressure building, regardless of what that stocks report might say, US soybean stocks are growing at this time of the year.

That means natural downward pressure on soybean prices, with a spillover to other oilseeds like canola, at this time of the year.

Basically it is a bit too early in the season for canola prices to have found a pre Australian harvest price base. That means we are likely to see another round of price falls for the canola market, and depend- ing on how low those prices go, will determine whether the rally back to $485 per tonne today $498/t in Victoria) was actually a sales opportunity or not. For most SA growers with sales in place, today was not a sales opportunity.

MARKET DRIVERS

The lift in the market has been supported by gains in wheat and corn over the last week, which spilled over to soybeans. Also, canola has suffered reasonable price falls and we were probably due for a correction.

Canadian farmers have been active sellers as they struggle to find places to store their big crop. However, recent heavy rains have stopped harvest, and taken some selling pressure off the market.

The weather is set to improve this week and strong harvest progress is expected, so we might see increased Canadian farmer selling a neg- ative factor in the market later this week.

CURRENT PRICES IN CONTEXT

Current canola prices of around $485 per tonne are just below dec- ile 7 levels on long term data. Since 2005, there is only one year where the harvest average canola price has been lower than the price we are currently looking at. This is a little sobering, as prices above $550 per tonne in June and early July were at decile 8.4 levels, and were just within what we would call our “normal” forward selling window of July and August. It looks as though it was important to have been actively forward selling in the July August period, as we were suggesting at the time.

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Key Points –

• The sell off in canola has continued.
• When combined with a lift in the dollar, we have seen another $5—$8 per tonne come off prices in South Australia and Victoria in the last week
• Prices now look very likely to still be under $500 per tonne for our harvest period.
• The exportable surplus from South Australia looks like being more than that of NSW and of Victoria.
• As available supplies for domestic and export use tighten in the new year, basis levels might improve.

Canola Futures

The downward price pressure on Winnipeg canola futures seems to be relentless as Canada ploughs their way through harvesting a rec- ord canola crop.

Even when price support does flow over from US soybeans, canola often shrugs it off against good harvesting conditions for what is a very large crop.

The same pressures are now applying to US soybeans as more of their crop gets to harvesting. In the last 6 trading sessions, Novem- ber CBOT Soybean futures have fallen from a daily closing contract high of 1396 USc/bu in the wake of the September USDA Report, to a close of 1315.25 USc/bu on Friday night. That is a drop of A$38.77 per tonne, so no wonder canola is also coming off.

It is unrealistic to have thought that oilseed prices would hold up during September this year, when prices were at very high levels after last year’s shortages, but we were also on the cusp of very large oilseed crops in North America, in spite of the last minute weather issues hitting the US soybean crop.

So our view that all preharvest selling should be finished off prior to the end of August has turned out to be very sound this year, and for the correct reasons.

Basis Levels

A contributing factor to recent falls in Australian prices is not just the drop in Winnipeg futures (or the lift in our dollar), but also a drop in basis, or the gap between Winnipeg futures and our cash market after accounting for currency.

Last week that erosion of basis stopped, and in fact basis recovered in the Pt Adelaide zone by $4.52 per tonne (ie Pt Adelaide prices fell by A$5/t against Winnipeg that fell A$9.52 per tonne).

Nevertheless, it has pushed canola prices down to $481 per tonne in that market, and $485 per tonne in Victoria.

If these prices persist it will well and truly meet our expectation of prices being sub $500 per tonne off the header, and will make any forward sales look very good indeed this year, particularly those done at over $520 per tonne during July and August.

Exports

Exports from this harvest should go close to 2.6 mill t. While this is well down on the 3.38 mill t estimated to have been exported from the 2012/13 crop, it will still leave a lift in exports from Western Australia and South Australia. If demand into China and the EU is strong enough, it may see basis levels in all states improve as the supply from this year’s harvest begins to be used domestically and for export.

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Key Points -

• The sharp drop in canola futures and cash prices in the last two weeks once again shows why September can be a tricky month to be making forward sales.
• With futures down over A$40/t, and a drop in basis, cash prices in the Pt Adelaide zone have moved below $500 per tonne. We would hope for some recovery after the Canadian harvest but that may be after more losses.
• In A$ terms Nov 2013 futures are at levels seen last in December 2012.
• Adelaide cash prices are at their lows, and close to $85 below the peak seen in June.

Market Pressure

As expected, canola is coming under pressure as the Canadian harvest advances, and more of their crop gets clear of any freeze risk. Light frosts have occurred apparently, but no damage is being reported.

Yields in Canada are good, and the expectation is that production will be a record, rebuilding Canadian canola supplies after last year’s shortages.

Recent price support came from the hot, dry weather in the US soybean belt. That weather has moderated, and recent rains are seen as limiting further yield loss. In the absence of further drivers to the upside, prices are under pressure, while remaining somewhat volatile.

In some respects though, Canadian canola has delinked itself from soybeans as the canola harvest progresses and as yields continue to come in at or above expectation.

Basically at this time of the year it is very hard for canola prices to rally, meaning that once again by the time we get to September, the best of the pricing opportunities are over.

The perception is that Canadian canola futures and US soybean futures prices are highly correlated. That has not been the case for the November 2013 contracts, with the correlation since November 30 2012 being just 5.7 percent. For the period from the end of May to the end of August it has been 65.7 percent. A part of the issue is currency, much as we have seen between Australian and US wheat prices.

Most recently, since August 26, US soybeans have been well supported with their weather concerns, but as the Canadian canola harvest got underway, and their record crop looked more assured, canola prices have pulled back sharply against US November soybean prices.

Harvest Pricing

Prices below $500 per tonne off the header have to be expected, but we have certainly got to that level very quickly in the last two weeks. In the absence of drought or a wet harvest, it has always been hard for harvest canola price to average more than the average price during the August to October period. At the moment that average is sitting at $522.67 per tonne and falling rapidly as current prices move below $490 per tonne.

If the market averages $480 per tonne between now and the end of October, the August October average price will be close to $500 per tonne. Any harvest price above $500 per tonne will therefore be worth looking at as being likely to be above average for the harvest period.

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Key Points –

• September normally heralds the time to stand aside from further forward sales.
• The lateness of the year in Canada means that the window of opportunity is open a little alter than normal this year, but be cautious
• If there is a frost issue that takes significant production away from Canada, the resultant price increase may well hold to our own harvest anyway, without needing to be locked in now.
• It will be unusual if the peak September October price comes in more than $10 per tonne above the peak August price, or the peak harvest price.

Forward Selling Strategy

We are now in September, and in a normal year the Canadian harvest would be gaining pace, and prices would be coming under pressure as the last of the risk premiums leave the market, and as grower selling puts normal harvest pressure on prices for both Canadian canola and US soybeans.

Normally the beginning of September heralds the time to stand aside from all further canola sales until we basically get to our own harvest in November. As we have said before, if prices rally during the US/Canadian harvests, it is normally because production is falling short, and by then nothing can be done about it, allowing the higher prices to pass through to our own harvest period without us having to add to sales during September and October.

However, we have had frost issues in the Canadian canola crop in September before when the crop has been running late, and that remains a risk for this year as well. It can be a time to capture higher prices, and the lateness of their crop is leaving the forward pricing window open a little longer for us this year, as long as the prices being locked in are at the upper end of the range.

Note that if there is an actual frost, and it does pull significant tonnage off Canadian yields, on top of the heat damage to the US soybean crop, it may push the market to the point where sales being made against the rally still get left behind. So there will be risks with adding to forward sales in September against a Canadian frost event if it should occur.

We also have to note that our own production potential is under pressure after a dry August in key NSW growing regions, and the hottest start to spring on record across South Australia and Victoria. Be wary of pushing sales too hard while we face our own significantly production risk. It may also mean that or harvest prices are well supported if production is cut back in the northern crop, putting pressure on supplies for domestic crushers.

Australian Prices

Prices are generally following A$ Winnipeg Futures prices on a daily basis, but the premiums seeing seen in eastern Australia are continuing to build, as their season gets drier, and frost has an impact.

With a bigger crop expected in Canada this year, there is also very little difference between Canadian futures prices and EU futures prices (Matif). Last year Canadian prices opened up a big premium against local shortages in that market. That is not likely to happen this year, and we should see Canadian, European and Australia prices all move together.

Prices at Pt Adelaide averaged $532.73 per tonne over the July to August period, and peaked at $559 per tonne. Selling below this average before harvest will increase the chances of harvest prices overtaking your forward sales.

1. Often peak prices in September/October come in under the peaks seen in July and August, or are not signfncatly higher.
2. In most years when September October peak prices are above the July August peak, prices are even stronger in our November De- cember harvest period.
3. There is only one year out of the last 13 years when the peak September October canola price has been more than $10 per tonne better than either the August peak or the harvest peak price.

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Key Points –

• In a repeat of last week, Canola futures surged by A$22.95 per tonne overnight on Monday night to deliver an A$18.53 per tonne lift for the week.
• That should push new season Australian prices above $560 per tonne in many port zones today (Aug 27th).
• This is giving us another selling opportunity within our preferred forward sales window time of July/August.
• The driver of the market is the current hot dry weather in the US and the impact it might have on the US soybean yield. Canadian canola also remains at risk from an early frost.

Forward Sales

This year’s forward selling season (July to August) is proving to be a positive one, with weather issues in North America giving us a late price rally before those crops mature and get locked in. It is being helped by the late season in both the USA and Canada, which is leaving both the soybean and the canola crops vulnerable later into the year than normal.

If the current issues do generate measurable declines in output, and growth in stocks is limited as a result, the current high prices may well persist into the post harvest period in North America, setting us up to have good prices for our own harvest. Therefore it is important to capture sales on these price spikes, and stand aside in between.

If the market continues to rally well into September, it will also be a time to stand aside until our own crop is secure, as normally strong prices in late September and October are retained into our own har- vest anyway.

Given that we are now at the end of August, we should be close to having all our forward sales in place. This should be somewhere between 33 percent and 50 percent of assessed potential production for those who are serious about pricing canola ahead of the harvester.

However, because of the lateness of the North American season, further sales into the first week of September, against any further price rises, should not be discounted this year.

Price Differences

We are opening up some signfncatly differences in prices around Australia at the moment. Even within South Australia we are seeing a price of $550 per tonne at Pt Lincoln versus $537 per tonne at Pt Adelaide on the same day. Newcastle prices were also on $550 per tonne.

The problem a Pt Adelaide is the ban on exports to China that is still in place, with sales into that market already in place out of Pt Lincoln. In Victoria prices are showing a more modest premium, but there is also an early shipping program in place there, with bulk shipments due to leave in December.

In the Newcastle zone, the season is not as favourable, and the domestic crushers will be keen to secure canola tonnes rather than see it all go to export.
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Key Points –

• Canola futures surged by A$21.37 per tonne overnight on Monday night to deliver an A$24.40 per tonne lift for the week.
• That has pushed new season Australian prices above $540 per tonne in may port zones ($534/t Pt Adelaide)
• This is giving us another selling opportunity within our preferred forward sales window time of July/August.
• The Canadian crop estimate could go over 15 mill t, and demand for rapeseed for biofuel production in Europe appears to be levelling out.

A burst of hot dry weather in the US has put soybean yields under pressure and allowed US soybean futures to rally, taking canola futures along as well.

However, there are some who think that the yields projected by the USDA are too low anyway, so there remains divided opinion on exactly how large the US soybean crop will be despite the current potential setback to yields.

In Canada, while the risk of an early, damaging frost remains, the view is that they are on track for a new record crop over 15 mill t. This could lift their output by 2 mill t on last year’s crop, and lift global output by close to 5 mill t.

On the demand front, there seems to be a levelling out of demand for grains and oilseeds for biofuel and ethanol production. The claim is that the era of rising EU production of biofuels based on food crops is over, much as it is in the US as well.

The USDA are suggesting that EU biofuel output is set to stabilise at 10.3 mill litres, below the peak of 10.9 mill litres set two years ago. That will limit the growth of import demand from the EU, and with their own crop being larger, and the nearby Ukraine crop also lifting, is likely to cut into demand for imports from Australia.

With our own crop set to come in above 3 mill tonnes again, any reduction in exports to the EU will need to be replaced with imports by China, if we are going to see our big crop cleared easily to export markets.

If overall export demand does ease a little, it will put pressure on canola prices in early 2014, after the first wave of export shipments are in place and executed.

Strategically, make use of the current market rally to get a good parcel priced (eg a third to a half of expected production). We proba- bly have until early September to get that done this year, because of the late season in Canada (we normally would suggest having the forward sales program completed by the end of August).

We would then plan to make more sales in the harvest period (November onwards), to capture exporter demand for early shipments. Only very high prices in September and October would tempt us to deviate from this.

Be wary of holding canola for sale after the main harvest period this year. If demand into export markets is softer this year because of reduced demand into Europe and Chinese demand not filling the gap, we may see prices soften in December and early 2014.

The costs of holding canola are relatively high approaching $5 per tonne per month, so it does mean prices have to rise by that amount to make delaying sales worthwhile anyway.

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Key Points –

• We continue to get opportunities to forward price canola at above $520 per tonne.
• If the North America oilseed crops escape significant freeze damage, prices are likely to be below this by mid September.
• Forward sales programs should be finished off by late August or early September. If there has been damage to the Canadian crop in particular, price support should flow through to our own harvest without needing to aggressively add to sales until our own harvest.

This time of year is often a good time to be finishing off canola sales. Canola and soybean futures are normally still holding risk premiums ahead of the crops maturing for harvest. Once harvest gets underway, and weather risks have not materialised, prices tend to fall away.This year is no exception, and with US and Canadian crops being later than normal, the risk of an early freeze damaging the crop pre harvest is higher than normal.

So, despite a big crop expected in Canada, and US and global soy bean stocks being restored to 2010/11 levels, prices are still getting some support within the strong downward price trend that has been a feature of the canola futures market since mid June.

If the North American crops come off without any early freeze damage, it will probably put more downward pressure on oilseed prices until we are clear of their harvest period. That will set the price levels for our own harvest period.
The risk remains that we have not seen the lows in canola yet, and that if the market does trade significantly lower, it will put our harvest price base below $500 per tonne. Any prices well above $500 per tonne are an opportunity to add to sales, but we would stand aside once the Canadian harvest gets close (September).There is also a large rapeseed crop coming off in Europe, with production estimates in July being 21 mill t, and likely to increase from that. Ukraine output is also up about 1 mill t on last year, and the global crop is set to lift by more than 2.3 mill t. The demand for rapeseed into Europe from

Australia is not likely to be as strong as it has been in recent years.

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