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How high can(ola) prices get?

14 December 2021 | 4 min read
James Maxwell (Senior Insights Manager)

With a record canola crop on the way and near record prices, we take a look at what is driving values.

Background:

Before midway through last year, $650 to $700 per tonne was a good price for Australian canola. Since March of last year, prices have continued to climb and peaked around or above $1,000 per tonne in October. Prices have eased a bit since then but remain around $900 per tonne. Australian production is forecast at a record 5.7 million tonnes this season, 66 per cent above average.

Graph showing Kwinana Canola prices from 2016 to 2021. Canola prices are sitting well above previous years, with prices not seen before last year.
Canola prices are sitting at prices not seen before last year.

Source: Profarmer Australia

Did you know?

The name 'Canola' was originally a trademark name of the Rapeseed Association of Canada. The word canola is a condensation of "Can" from Canada and "OLA" meaning "Oil, Low Acid". Canola is a variety of rapeseed characterised by low erucic acid. Sometimes, 'rapeseed oil' is used to refer to the oil for industrial purposes, where 'canola oil' refers to the edible cooking oil.

Why are prices so high?

In short, Australian prices are near all time highs due to a global shortage of canola. The United States Department of Agriculture (USDA) estimates 2021/22 world canola production to be 67.5 million tonnes. This is a year-on-year reduction of seven per cent, and six per cent below average. While this may not seem like a lot, if we dig a bit deeper it becomes clearer why. Canada is not only the world's largest producer of canola, but also the largest exporter by a long way. In an average year, Canada exports around ten million tonnes of canola. In an average year, Australia exports 2.5 million tonnes. But due to a severe drought this year, Canada has produced less than 13 million tonnes compared to around 20 million on average. The USDA estimates Canada's exports this year will drop from around ten million tonnes to 5.7 million tonnes. This leaves a four to five million tonne gap in canola available to importers. Buyers are driving up prices in an attempt to secure the stock they need.

Chart showing Canadian Canola Production from 2010 to 2021 against a five year average. Severe drought has seen conola production in Canada drop to 13 million tonnes compared to around 20 million toness on average.
Canadian canola production is at its lowest level since 2010/11.

Source: United States Department of Agriculture

But that's not the only reason:

Canola is widely used in biofuel production. When blended with diesel it can be used by passenger vehicles, trucks, and even industrial equipment used in mining, forestry, construction and agriculture. As the world recovers from COVID-19 and more vehicles get back on the road, demand for biofuels is increasing.

Because biofuel competes with 'regular' fuel, its price is affected by crude oil prices. In October the price of crude oil hit its highest point since 2014. This has raised the price of biofuel, and in turn canola prices.

So how long will high prices last?

While there are other factors contributing to high canola prices, the fundamental reason is a global shortage of stock. The only thing that will rectify the situation is more supply, which means any price decrease won’t happen until northern hemisphere harvest. The Brazilian soybean harvest around April/May will ease some pressure on oilseed demand. This will likely see lower Australian prices. Assuming Canadian production rebounds to around average production, a significant drop isn't expected until harvest which starts in September next year.

In the meantime, Australian canola growers can enjoy the good oil of very high prices and strong demand.

Sources: Profarmer Australia, United States Department of Agriculture

This article is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Rural Bank, a Division of Bendigo and Adelaide Bank Limited, ABN 11 068 049 178 AFSL/Australian Credit Licence 237879, makes no representation as to or accepts any responsibility for the accuracy or completeness of information contained in this report. Any opinions, estimates and projections in this report do not necessarily reflect the opinions of Rural Bank and are subject to change without notice. Rural Bank has no obligation to update, modify or amend this article or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth therein, changes or subsequently becomes inaccurate. This article is provided for informational purposes only. The information contained in this article does not take into account your personal circumstances and should not be relied upon without consulting your legal, financial, tax or other appropriate professional.

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