Canola enjoys U.S. soybean oil’s success

Canadian canola seed prices are linked to U.S. soybean oil prices and that’s a good thing these days.

U.S. soybean oil is selling at a premium of US$150 per tonne over South American soybean oil, up from $20 per tonne in April.

That reflects a stronger domestic demand for the product in the U.S. market relative to Brazil and Argentina, according to the U.S. Department of Agriculture.

The U.S. domestic market is projected to consume 93 percent of all soybean oil produced in that country this year compared to 80 percent in Brazil and 13 percent in Argentina when biodiesel exports are factored in.

“This shows the role that domestic demand plays in setting prices in the United States, in contrast to both Brazil and Argentina where global demand factors play a larger role,” the USDA said in its recent Oilseeds: World Markets and Trade report.

U.S. domestic soybean oil consumption is forecast to grow by 3.3 percent in 2022-23.

A 28 percent increase in industrial uses, including biodiesel, is fueling that growth. Food and feed use of all oils in the U.S. is growing by less than one percent by comparison.

Meanwhile, domestic oil demand in Brazil is declining, with industrial use accounting for two-thirds of the drop as Brazil has reduced its blending requirement for biodiesel.

“With declining domestic demand, there is less price pressure in the Brazilian market,” said the USDA.

Ken Ball, advisor with PI Financial, doesn’t think there is much demand for Canadian canola oil in the U.S. biofuel market, but the crop still benefits from the robust and growing demand for U.S. soybean oil.

“(Canola oil) will still be drawn down there as a substitute if they keep moving increasing amounts of soybean oil into the biofuel program,” he said.

“They’ve got to find something to replace that oil in the food market.”

Canola oil is the logical substitute because the same companies that are crushing soybeans in the U.S. are also crushing canola in Canada.

“For them to be able to have a market to move the canola oil south, it’s a lot easier to do that than to try to sell it to China,” said Ball.

The usual relationship between canola and soybean oil prices changed in 2021-22 due to the extreme tightness in canola supply caused by Canada’s drought.

“It was a very radical situation,” he said.

“We had to kill 50 percent of all demand for canola, and we did.”

Canola prices skyrocketed this year putting pressure on crush margins. Ball’s crush margin index for November canola got as low as $30 per tonne, which is “padlock the doors” territory. But it has since rebounded.

“Just a few months ago (canola oil) was insanely expensive relative to bean oil. Now it’s comfortably valued within the normal range,” he said.

Ball expects that more normal relationship to stay in place for the time being if Canada’s crop stays in good shape.

“We’ve obviously got issues in the eastern Prairies but overall, we’ve got a fair-to-good canola crop potentially brewing right now,” he said.

The other factor to consider is petroleum prices since a growing portion of soybean oil is being used to make fuel in the U.S.

Petroleum prices are up 45 percent in the U.S. since the start of 2022, while soy oil prices have risen more than a third over that same timeframe.

“As vegetable oil supplies eventually grow, resulting price declines will be limited if current high energy prices continue,” said the USDA.

Ball said a few months ago U.S. politicians were talking about trimming biofuel mandates as food was winning the food versus fuel debate.

But the pendulum has swung.

“The cost of gas prices seems to be dominating over the food price right now as the main concern of politicians,” he said.

Tags: Canada, biodiesel, U.S., Market, Argentina, biofuel, demand, soybean oil, Brazil, canola, prices