Canola’s strong ties to crude oil is a cause for concern, says an analyst.
“The risk of a price drop is there, and farmers should be aware of it,” said Western Producer markets desk analyst Bruce Burnett.
Nearby canola futures values rallied 17 per cent between the start of the year and April 7, due in a large part to surging crude oil prices.
The link between the two commodities is stronger than ever due to increased global biofuel demand for soybean, canola, palm and other vegetable oils.
Some countries are increasing biofuel blending rates to help combat rising crude oil prices caused by conflict in the Middle East and severely restricted oil tanker traffic in the Strait of Hormuz.
The average retail price for diesel fuel in Canada was $2.33 per litre as of early April, according to Natural Resources Canada. That is 59 per cent higher than where it was at the start the year.
Canola has benefited from diesel’s price appreciation.
But what happens if there is a resolution to the conflict in Iran and oil tankers are suddenly able to once again move through the Strait of Hormuz, putting downward pressure on fuel prices?
“There is a risk that (canola) prices will go down if the crude oil prices drop dramatically,” said Burnett.
As a result, it might be time to consider locking in today’s prices, which are decent.
“Look at selling a little bit, especially if you haven’t sold any new crop yet,” he said.
Farmers have not planted their crop and have no idea how much they will be producing, but this is an opportunity to protect at least a portion of that production against the downside risk.
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