Canola the market contrarian — what’s the right call on pricing?

If you’re wondering what on earth is going on with the canola market, you certainly aren’t alone.

Shaun Haney, RealAgriculture founder, took this question to Jonathon Driedger, vice president of Leftfield Commodity Research, to gain some clarity.

At the time of the interview, November canola was almost at $800. At the end of May, the November contract hit its one year low of $617. This increase over the last month and a half has many scratching their heads — likely due to canola itself being a tough commodity to predict.

“Canola is notoriously difficult to get a sense of what the yield is in Western Canada,” says Driedger. “But I think in the case of canola — and similar to some of these other markets — the pendulum simply swung too far to the downside.”

On a risk-reward basis, there was significant concerns of drought but after some timely rains early in the season, the downside was overshot, says Driedger. Whether or not where it currently sits is a reasonable price for canola is a tough question to answer, but we know the canola crop isn’t getting any bigger.

“Overall, the canola crop is shrinking, and we’re going to have to ration demand,” he says. “Maybe the market is starting to process that that needs to happen. We simply will have less canola than maybe people were thinking two months ago, for example.” (Story continues below interview)

Without knowing what the yield is, it’s tricky to decide whether to make a call on the current pricing. However, as Driedger notes, a defensive play may be the one to follow. Whether that means pricing some crop now, or looking at other tools available.

Some of the tools include put options that give you downside protection with the plus of no production risk, but they can be quite expensive, which makes it a harder pill to swallow.

When considering what to do, Driedger warns to not be blindly bullish.

“We talk about rationing export demand, that might well be happening. And it might even happen at a lower price,” he explains. “I think about last year, for example, we did a lot of export demand rationing. Even as the absolute price went lower, because we’re still expensive on a relative basis. So those are the sorts of things I think we need to be a little careful of.”

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