Overview

Canola is a major Canadian crop, with virtually all production occurring in Western Canada. More acreage is planted to canola than to any other crop except wheat, making it the number two field crop.

Canola is a term for specific types of rapeseed, which yield low levels of euricic acid in the oil portion and low levels of glucosinolates in the meal portion. Canola oil is therefore a premium vegetable oil. Canola meal is suitable for use in livestock feeds. The term “canola” is a word coined from “Canadian oil”.

Table 1: Distribution of Canola Acreage and Production by Province

Statistics Canada 2006-Cat. 22-002-XIB; Census of Agriculture 2001 Table 95F0301XIE

Notes to Table 1: Totals may not add up due to rounding.

Canola (sometimes called double-zero rapeseed in the global trade) ranks third as a source of vegetable oil, after palm and soybeans. Palm and soybeans each supply about 30%, while canola supplies 15%. Sunflowers follow canola as a source of vegetable oil. Other sources include olive, peanuts, safflower, cottonseed, palm kernel and coconut. Canola is the second largest source of high-protein meal, following soybeans.

Within Canada, canola is the largest source of vegetable oil, supplying about 75% of requirements with soybeans supplying the remainder. Canada is the world’s second largest producer of rape/canola, after China. Approximately 55-60% of Canadian production is exported as whole seed. Major export destinations include Japan, China, EU, Mexico, U.S. and India.

Canola seed yields about 42% oil when crushed, as compared to about 20% oil yield of soybeans. Of the domestic crush, about 45% of the oil and 65% of the meal is exported.

Market Characteristics

In Canada, canola is an "open market" commodity with canola demand being fairly evenly split between domestic and export markets. Following harvest, most growers have facilities available for drying and storing canola seed. Canola in storage is prone to heating and must be closely monitored on a regular basis to ensure quality maintenance.

Growers have several marketing and delivery alternatives including:

• The country elevator - the local elevator is the collection point for grain handling companies. Canola can be delivered to elevators and sold on the spot market (or cash) at any time. Canola purchased from growers is sold to the end user or to a broker or exporting company. Some country elevators may also act as collection and storage facilities for domestic canola crushers.

• Crushing Company - growers can sell directly to crushers, who usually offer the same range of pricing and delivery contracts as elevators.

• A grain dealer - grain dealers are essentially grain/canola marketers or brokers. They may not have an extensive infrastructure for storing grain or oilseeds nor do they usually make sales directly into foreign markets. They arrange for a sale to an exporter, purchase canola from growers, and are then allocated rail cars, called dealer cars, to ship canola (usually to Vancouver) to meet their sales commitments.

Methods of Selling

Each sales channel offers a range of pricing, delivery and payment alternatives. These are described as follows.

Spot or Cash marketing - sell to the local elevator at the spot price as the grower sees fit. Growers can utilize the marketing services offered by the country elevator and simply sell at harvest time. Growers can achieve some protection against risk (or spread their risk) by selling throughout the year instead of a one-time only sale.

Production Contracts - a production contract is an agreement between the grower and a contractor to deliver canola produced on a specific number of acres. Production contracts are most often offered by crushing companies. Elevator companies may offer production contracts, particularly for specialty oil canola that has unique characteristics such as high levels of linoleic acid. The contract commits the grower to delivering the production from a given acreage, and the company to accept the crop. Pricing is agreed under one of the methods described below.

It is important to understand the terms of a production contract. It may specify grades to be delivered with other grades being accepted only at the buyer’s option. The contracts may also specify quantities. Contracts may specify costs and conditions for releasing a grower from the contract.

Deferred Delivery - this type of contract allows the grower to lock in both a price and a basis[1]. It is a contract for an agreed price and a specific delivery period in the future. This is essentially a hedge which commits the seller to a known price. It differs from a futures contract in that the producer does not have to put up a margin with a broker nor does it require the grower to put up even more margin (a margin call) when market goes the wrong way. On the other hand, there is no upside. The quality of canola is specified in the contract and the buy-out costs may be high if quality criteria are not met.

Basis Contract - this contract is much less common than the deferred delivery contract and may not be offered at all times. The contract is mutually negotiated between the grower and a contractor. An agreed basis level is established at the time the contract is signed. The grower can price canola anytime within a specified period. The delivery price is then calculated using the specified futures month price minus the agreed basis. In this case, the grower assumes the risk that prices may rise or fall during the period between the signing of the contract and actual delivery. However, the basis risk has been eliminated in the interim.

Deferred Pricing Contract - the grower can deliver canola to either a crusher or elevator or put the canola into on-farm storage and sell it at a later date. The grower has 90 days from the time of delivery to price the canola. The grower can benefit from any price increase or basis narrowing, but also can lose from a price decline or basis widening. If the grower does not price canola within 90 days, the company automatically does it for the grower, and the grower must accept the market price on the 91st day. The advantage to deferred pricing is that it lets the grower deliver canola when it is convenient or when space is available, without requiring that the grower accept the current market price. The grade, weight, dockage and moisture content of the canola are settled at time of delivery.

Grain Pricing Order or Target Price Contract - some companies allow the grower to place an order with an agent for a specified price. If the market reaches that price the quantity of canola committed is sold. This option is available for either canola stored in the elevator or canola stored on the farm. In the case of canola stored at the elevator, if the target price is not reached within the specified time, the canola is priced on the next business day. For canola held on the farm, the grower can have an open pricing order. This means there is no time limit on the contract. When the target price is reached, the canola will be delivered.

Producer car – growers can sell through an exporter, load their own railway car and deliver directly to terminal elevators, avoiding elevation and other costs associated with the country elevator system. Inspection and grading is done by a Canadian Grain Commission (CGC) inspector at the port elevator. Growers must apply to the CGC for producer cars.

Futures market - growers may decide to use the futures market to "lock-in" a price and then liquidate the futures contract position when they deliver the canola in the cash market. Farmers may also deliver against a futures position via a third-party agreement with a merchant participant.

Price is, of course the main factor in determining when to sell and to whom. However, effective marketing requires growers to look past the apparent price and consider:

• What does the price include (e.g. are there services attached to it and are the services of any value)?
• What is the cost of not accepting the price (e.g., consider the carrying costs, such as storage and interest associated with a certain option)?
• What are the probabilities of upside and downside price movements?

The timing of a sale is also influenced by several factors including price, cash flow requirements, logistics, storage requirement and weather.

Key Changes or Recent Issues

World trade in canola oil is expected to remain high and crush is expected to increase to record levels, largely because of strong growth in industrial demand, especially in the EU and the U.S.

The big story in the oil market is alternative fuels. Canada and the U.S. are following the European lead in production of biodiesel, diesel fuel from vegetable oil. The EU has mandated a 5.75% biofuel use by 2010, and the biofuel industry goal is to achieve 15% of the diesel fuel market by 2015. Plans for new plants in Canada have been announced which will increase Canadian canola crush capacity to about 7.0 MT, from about 4.0 MT in 2005-2006. In addition, plants in the U.S. will require another .5MT of Canadian canola. This has far reaching implications for producers of all grains as the production economics change.

The developments in the biodiesel industry will be affected by factors including:

• Tax and other support structures for the biodiesel producers.
• Requirements for biodiesel percentages.
• Ability of the livestock and other industries to absorb byproducts of the biofuel processes.
• New uses for byproducts.
• A segregated market for high oil content rapeseed varieties adapted to biodiesel production.

Price Discovery

Canola futures are traded on the Winnipeg Commodity Exchange (WCE), but the prices essentially are directly influenced by the prices of the soybean complex, which are set on the Chicago Board of Trade (CBOT). Prices offered by local elevators and dealers are guided by the prices set on the WCE. The difference (or basis) between the local elevator price and the quoted price on the WCE reflects the costs of moving seed to a port elevator. The basis can vary depending on logistics, local conditions and demand for domestic feedstock.

Key Quality Issues

Quality dimensions of canola are defined by the grading standards set out by the Canadian Grain Commission. The primary quality indicator is colour, which indicates the general degree of maturity and damage from weathering.

Immaturity (green seeds) in a sample of canola occurs when the seed is harvested before it has reached physiological maturity. The main effect of immaturity is the amount of chlorophyll in the oil. Chlorophyll is undesirable in finished products not only because of its colour and reduced shelf life but also because it might lead to off-flavours. Oil losses and processing costs in the refining process increase with higher levels of chlorophyll.

Colour is assessed for the cleaned samples. The general degree of maturity and the amount and degree of discoloration, such as weathering, is considered along with the proportion of damaged seeds present. Consideration is given to such factors as light rime or redness associated with growing conditions, which affect the general appearance, but which are not extremely detrimental to quality. A Standard Sample (prepared by the CGC for every crop year) of the grade is used to assist in evaluating colour.

Other factors contributing to quality include: conspicuous admixture; broken seeds; contaminated seed; earth pellets; ergot; animal excreta; fertilizer pellets; fireburnt; foreign material; heat damage; inconspicuous admixture; insect excreta; odour; sclerotinia; sclerotiorum; and staghead.

In summary, quality is a result of best practices in production, storage and handling.

Risk Factors

Canola is an unregulated commodity in North America and the price is determined by free market interaction of supply and demand. The market is tied to the overall economy in a very complex web of causes and effects.

Canola has a complex price risk because it is crushed for the oil, with meal being a by-product. The prices of soy oil and soybean meal (also commodities that are traded on the CBOT) are the main drivers for canola prices.

Factors affecting canola markets include:

• Changes in livestock numbers in North America.
• Currency exchange situations between Canada and importing nations and among exporting nations.
• Palm oil production.
• Policies of foreign governments concerning subsidies or GM product.
• Weather conditions in the major oilseed growing areas particularly the U.S. soybean belt.
• Basis levels.
• Timing of world harvests, U.S. soybeans, South American soybeans and Canadian canola.
• Overall economic conditions.
• Consumer trends such as the current concern about trans fats which favours canola oil.

There are many sources of information within the industry that can be used including: the provincial departments of agriculture; Statistics Canada; commodity brokers; newsletters; and grain-handling companies.

Closing Comments

In developing a marketing strategy, take two key factors into consideration: (1) your cash flow requirements and (2) your cost of production. The timing of cash injections into the operation will help determine during what periods of the year to sell canola. The cost of production (fixed and variable costs) will provide a guideline as to what you require as an acceptable selling price.

[1] Basis is defined as the difference between a quoted price (cash or futures) at a major delivery point and the price being offered locally.