Canada Markets

The spread between canola and wheat prices can be viewed as a predictor of acreage swings between Western Canada's two largest crops. The spread on the attached chart indicates November canola having gained on wheat since December 22 when the spread reached a low of $138.44/metric tonne (Canadian dollars, canola over HRS), while reaching a weekly close of $187.09/mt in last week's trade (canola gaining relative to wheat). The spread weakened today given a $2.20/mt drop in November canola with a 14 1/4-cent rally in the December HRS contract. In theory, this trend may pull acres from wheat in favor of canola.

Looking at this spread in the December-through-May period over the five-year period from 2009/10 through 2013/14, the spread strengthened in the first four crop years from a December low to a high reached in the March-through-May period. The rally in the spread ranged from a 9.4% increase in 2009/10 to a 69% rally in 2011/12. In the fifth year, or 2013/14, the spread declined or narrowed 38.3% between December and early May.

The first three years of this period resulted in the expected impact to seeded acres, with the increase in canola price relative to wheat resulting in an increase in canola acres relative to HRS acres during the spring.

The final two years of the five in question saw results that were perhaps the opposite of what would be expected given the movement of the spread. The fourth year of the study, or the 2012/13 crop year, saw the spread gain 41.9% from the Dec. 19 2012 low to the March 6 high, (canola price increasing relative to HRS), while there was a year-over-year reduction in canola acres of 9.4%, while HRS acres increased 6%.

In the fifth year of the five years in question, or the 2013/14 crop year, the spread weakened 38.3% (canola price falling relative to HRS) from the December 5 2013 high to the May 6 low. At the same time, there was a 1.9% increase in canola acres along with a 6.6% year-over-year drop in HRS acres.

The last five years has seen the spread in question rally by 22.2% on average from December to the high in the spring months which has resulted in an average year-over-year increase in canola acres of 4.6% while the average year-over-year spring wheat acres declined just .1%. At the same time, the last two years has perhaps suggested the unpredictability of this spread as a predictor of acreage shifts.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

© Copyright 2015 DTN/The Progressive Farmer. All rights reserved.