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Drought in Canada threatens canola crop, tightens global veg oil supplies

Highlights

Canola crop ratings hit their lowest in years

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A dry spring, patchy rainfall, and high temperatures in the Canadian prairies during June have raised concerns about the canola yields from Canada -- the world's largest producer and exporter of canola oil – and pushed prices of palm oil and soybean oil higher globally.

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Canola is the edible oilseed developed from rapeseed and is primarily grown in the western provinces of Alberta, Saskatchewan and Manitoba. Geographically the region is known as the Canadian prairies.

"Often, there are some areas of the prairies that are too dry and others that perform better, with one region offsetting the losses in others. This year, good-looking crops are few and far between and the losses are widespread," Chuck Penner, head of Canadian agri research firm LeftField Commodity Research, told S&P global Platts.

In June, drought conditions expanded in Alberta, while severe drought conditions were noted in parts of Saskatchewan province, Canada's Canadian Drought Monitor said in its latest report. Manitoba, another important canola-growing region, is facing severe-to-exceptional drought conditions.

These provinces have been marked as D2 or D3 grades, indicating the drought intensity in the region. D2 is given to a drought event occurring every 10 to 20 years, while D3 grade signifies a drought event which occurs once every 20 years or more.

Market participants have said they expect canola oil production to be below official projections this year despite a higher seeded area than last year.

In early July, the US Department of Agriculture's World Agricultural Outlook Board pegged its estimate of Canada canola (rapeseed) production at 20.2 million tons, while the Agriculture and Agri-Food Canada (AAFC) department projected 20.05 million mt of canola.

However, analysts are less optimistic and say that the current crop condition ratings are the lowest ever.

"If I had to guess, I would peg the 2021 canola crop at 16 million mt or lower, compared to 18.7 million mt last year," Penner said.

The news has coincided with concerns of slow output growth of palm oil in Malaysia and forecast of drier weather in soybean growing regions of US Midwest to boost sentiment in vegetable oil markets.

Tight veg oil supplies

Canada's drought announcement pushed ICE canola futures to their limit gain on July 9 and have supported edible oil prices since, as it was followed by news of slower-than-expected production growth of palm oil in Malaysia on July 12, industry watchers told Platts.

"Since canola is a high oil yield crop, the reduction in canola crop would be seen supporting global veg oil prices," according to Anil Kumar Bagani, research head at vegetable oil brokerage Sunvin group.

September palm oil futures hit its two-month high on July 15, supported by output concerns in Malaysia and firmness in rival edible oil prices, RHB Futures said.

Meanwhile, ICE Canola futures closed at CAD 912.1/mt ($725.42) on July 15, up 26% from a month ago.

The impact of a lower canola crop on the veg oil complex might intensify in the coming few weeks as canola prices in Europe, according to Gaurav Jain, founder of agrigoods research company AgPulse Analytica.

""European prices are down about $80/mt to Canadian prices mainly due to speculative interest in Canadian canola. The way the ICE prices moved this week and the last week is signaling toward a speculative rally," Jain said.