After a short period of unprecedented volatility oilseed rape values have bounced back to their previous highs. Can the bull run last? Robert Harris reports
UK oilseed rape growers are heading for a record crop next harvest. And not just by a small margin either.
Assuming DEFRA’s area forecast holds up, and the crops produce average yields, the nation’s barns will be bulging with as much as 2.5m tonnes of rapeseed, a massive 400,000t more than was harvested in 2010. That would leave an exportable surplus of up to 500,000t, double this season’s level.
That might seem bad news for the market. But, even though the UK lays claim to being the third or fourth largest rapeseed producer in the EU after Germany, France and sometimes Poland, an increase even of that order will do little to address the shortfall in European production, which has pushed the market ever higher since last autumn.
“We’ve seen a huge increase in values recently, from £200/t ex-farm at harvest to £430 at the end of the year,” says Jonathan Lane, trading manager at Gleadell. “Europe had disappointing yields last harvest, producing a smidgen over 20m tonnes, which meant it needed to import 2-3m tonnes. Ukrainian production also slipped, and we had to turn to Australian imports to cover the last 1m tonnes.”
With the old crop market more or less done, values will probably track soyabean and crude oil markets until next harvest. There are unlikely to be any surprises, he adds. “The soyabean complex looks well supported, and I don’t see crude oil prices falling any time soon.”
As far as new crop is concerned, the tight feel looks set to continue, so the UK will have little trouble exporting its looming exportable surplus. “We may be heading for a massive crop, but it is going to be needed,” says Mr Lane.
“We will be one of the few in the EU to have a good production. Latest estimates put the 2011 European crop at around 20.8m tonnes, a very small increase on last year. Very cold, dry weather in north and east Europe has not helped late-drilled crops.”
At the same time European demand continues to increase, and this season’s crush will be in the region of 22.5-23m tonnes, 500,000t higher than 2010/11 due to increasing biodiesel use. Just five years ago, production was 16m tonnes, producing a 300,000t surplus.
“The world needs to produce good crops everywhere to rebuild stocks. Europe has now become a net importer on an annual basis, while China’s demand for oilseeds continues to grow rapidly.”
However, into the third week of March snow was still preventing Canadian farmers from starting the spring drilling campaign and it remained bitterly cold. “They would usually expect to be planting by the end of the first week of April, but that looks unlikely. And the floods in Australia, another key producer, will do the crop no favours there either.
“The overall outlook remains quietly friendly to the farmer. You can’t allow for significant political factors such as we’ve seen recently, or disasters like the Japanese tsunami, which shows how fragile markets can be,” says Mr Lane.
“But there is growing demand for biodiesel, crush margins are good and stocks are relatively low. We could see a repeat of this season, but with £370/t including bonuses available off the combine at harvest, farmers should probably be taking advantage.”
External factors have brought tremendous volatility to all commodity markets over the past few weeks, and oilseed rape is no exception, says HGCA cereals and oilseed analyst David Eudall.
“Political upheaval in North Africa and the Middle East and the earthquake in Japan made a lot of investors very nervous and they sought less risky places for their money. It is difficult to say how long these influences will carry on and in which direction they will eventually take the market.”
At the start of March, rapeseed was trading at €460/t (£402) on the MATIF (Paris futures) before plunging to €412/t (£360) by the middle of the month. A week later and the market had regained €40/t (£35).
“Prices needed to rebound to reflect what’s actually going on in the market,” says Mr Eudall. “It has been dominated by European fundamentals – we are still seeing very strong demand in the last half of the season, with Australian imports having to fill the gap. Seed prices need to remain high to reduce demand as there will be no new supplies until the summer.”
Mr Eudall reckons Europe will continue to dominate events in 2011/2, supporting new-crop values. There is concern over Germany’s late-drilled crops, which were hit by hard winter frosts. Output could fall to 5.2m tonnes, about 500,000t down on last year.
Further east, Russia and the Ukraine have had a late spring. “There’s a lot of uncertainty – cereal drilling has been delayed by 10 days, so it’s reasonable to assume that oilseed rape has been as well. But, on a bearish note, the Ukraine does intend to plant more area and could produce 2m tonnes this harvest, compared with 1.5m tonnes last year.
Still, like Mr Lane, he believes strong demand will more than make up for that. “One third of all European oilseed rape now goes into the biodiesel market, and it’s growing every year.”
Other key market drivers include the soyabean complex and crude oil, though they have played less of a role of late, Mr Eudall notes.
Late rains helped South American crops that had been left dry for much of the season, though yield expectations are now being revised downwards slightly as the wet weather continues into harvest.
US stocks also remain tight. “Longer term, the supply/demand balance looks uncertain. Year-on-year, demand from China grows, and global demand shows no signs of slowing – we’ll need record crops soon to redress the balance.” Total demand in 2009/10 was 238m tonnes, and now stands at 256m tonnes; supply fell from 260m tonnes to 258m tonnes in the same period.
Crude oil is linked directly to the biodiesel price, so affects rapeseed values too. “The link is becoming stronger as more biodiesel is included in Europe’s fuel supply,” says Mr Eudall. “This market has become very volatile, with the political unrest across North Africa and the Middle East adding to uncertainty. It’s difficult to predict which way prices will go, but at the moment there’s no reason to expect much of a fall.