Apr 5, 2021
🌼 Your Guide To Investing In Canola, An Oilseed Commodity That Produces The “Healthiest” Oil
Brief Background
Canola is a variety of the rapeseed plant, bred and cultivated by Canadian scientists to get rid of the negative properties in rapeseed oil (namely its erucic acid content, with early research suggesting that it’s harmful to human health). Canola was actually a trademark name, a condensed form of “Can” for Canada, and “ola” for oil, low acid”. Now, the name is used to label the edible varieties of rapeseed oil. As a cooking oil, canola is arguably the healthiest compared to other vegetable oils due to its very low saturated fat content, and has a very high smoking point. Fun fact: the canola/rapeseed plant is in the same family as the cabbage, broccoli and mustard plants.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding canola to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, as an agricultural commodity, canola can act as a hedge against inflation. So, when the economy undergoes inflationary periods, agricultural commodity prices could rise in response to these conditions.
💰 Profit. Canola can certainly provide decent returns as seen from the price chart below. Even prior to the price spike, price swings presented opportunities for speculative investors and traders to profit. As with a number of other agricultural commodities, there are a number of long-term trends that could support and boost canola prices. These include emerging market demand, the impact of climate change, biofuel demand, and positive endorsements and associations regarding canola’s benefit to human health. However, there are a number of risks that could certainly put downward pressure on canola prices. These include overproduction by large suppliers in response to rising prices, a strong Canadian dollar, as well as research potentially explaining the harms of canola oil to human health.
What Affects Canola Prices
There are several key factors that are involved in moving the price of canola:
- 🇨🇦 Canadian Production. Canada is the world’s biggest canola producer, accounting for about ~27%, according to USDA reports. Though there are other countries that come close to this, Canadian production and supply can certainly affect prices since it’s also the biggest exporter, accounting for about ~64% of world exports. So, any disruptions in supply in Canada can have an effect on prices.
- 🇪🇺🇨🇳 Global Demand (Especially China & EU). Due to canola’s versatility and increasing use in biofuels, demand for canola is global, especially from the EU and in emerging markets such as China and Japan. EU canola imports have steadily been increasing over the years due to decreased production and increased biofuel demand. Furthermore, though Chinese and Japanese demand have remained stable, China has also been increasing its stockpile to prevent a shortage.
- 🏛️Government Policy. Policies such as biofuel mandates, import and export taxes can all have an effect on prices. These can all impact the supply and demand for canola, and therefore, can affect prices. In fact, in March 2019, China blocked canola oilseed imports from Canada’s largest producer as a retaliatory measure following the arrest of a Huawei executive. This sudden decrease in demand meant prices dropped as a response.
- 📈 Stock Levels. Stock levels can also play a part in moving prices as it can provide insight into supply and/or demand levels, which can then lead to speculation in the market. In fact, part of why there’s a massive spike in prices right now is because of dwindling Canadian canola stock levels, from about 4,435 TMT to about 1,200 TMT in just 3 years. Because of this, there is worry and fear in the market of a shortage, especially as global demand is expected to continue to increase.
- ☀️ Weather/Climate Change. As with other oilseed commodities, canola production (and therefore its prices) can be affected by adverse weather. Heat waves or excess rain can definitely affect production yield, resulting in lower supplies, therefore putting upward pressure on prices.
- 🔄 Substitution. As an oilseed, canola also competes with the others, including soybeans, sunflower, and cottonseed. So, if canola prices are higher than the others, this might lower demand as consumers have a number of alternatives to choose from. Alternatively, should the opposite happen where other oilseeds are more expensive, then this could boost demand for canola, increasing its price too.
- 🇨🇦 Canadian Dollar Strength. Unlike a lot of the other commodities, the benchmark for the pricing of canola is actually in Canadian dollars. A weak Canadian dollar compared to other currencies (i.e. need more CAD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in CAD & so can buy more canola) & drive up demand, increasing prices, and vice versa.
- 🏥 Health Benefits/Concerns. Canola is said to be the healthiest edible vegetable oil of them all, with many “seals of approval” from various health and government organisations. However, research that potentially highlights either the benefits or the harms of canola oil can potentially impact consumer demand.
🚀 What’s Causing The Recent Price Spike?
There are a number of factors that’s causing the recent spike in prices.
- Canadian canola crop produced less than was forecasted, restricting supplies in the world markets.
- Then, increased export demand to Europe since EU canola production has decreased the past couple years. Steady export demand to other countries too, like China, Japan, and the UAE.
- Though the pandemic has forced many restaurants to close, it boosted consumer demand for canola oil by consumers who prefer to cook with it.
- Due to increased export demand, there are widespread fears of a shortage, with data from crop forecasts and dwindling stockpile levels. This is evidenced by a USDA report indicating that Canada’s stockpile levels went from 4,435 TMT to 1,200 TMT in just ~3 years.
What Is It Used For?
Like a number of other oilseed commodities, canola can be used to create both food and non-food products. Here are some of its uses:
- 🍳 Food. Canola oil can be used directly as a cooking oil, or as an ingredient in processed foods like margarine, baked goods, salad dressings, and more.
- 🐄 Livestock Feed. Canola meal can be used as feed for livestock.
- ⛽ Biofuel. Increasingly, canola oil is also used as a biofuel.
- 💄 Cosmetics & Other Consumer Products. Canola oil can also be used to make a cosmetic products like lipsticks, creams, shampoos, soaps, etc. Consumer products include toothpaste, sunscreen, etc.
- 🏭 Other Industrial Uses. These products include pesticides, plastics, industrial lubricants, and inks.
The Case Against Canola
There are a couple of risks involved if you want to get involved with canola. Firstly, because of the recent price spike, it’s likely that various factors will contribute to downward pressure in response to this. One of these is the risk of overproduction by Canadian suppliers. In fact, one of Canada’s biggest canola producer just recently announced plans to double its crushing capacity. Though it won’t be operational for a while, increased future production further down the line can certainly lead to an overproduction scenario. Another risk is slowing export demand due to the higher prices. With alternative oilseeds available in the market, high canola prices could result in countries slowing down demand for canola in favour of cheaper substitutes. Secondly, research that potentially highlights the harms of canola could impact consumer demand for canola products.
The Case For Canola
Canola seeds are quite versatile, producing both canola oil and canola meal. Both have a number of end-use cases, in both food and non-food applications, including industrial products and biofuels. As such, demand for canola is expected to continue to grow, and as we’ve seen with import data from the EU, this is certainly the case. In fact, canola accounts for roughly 40% of biodiesel feedstock in the EU. In addition, emerging market demand could also play a role in boosting canola prices. Although China is a big canola producer, it doesn’t export any, and actually needs to import more as it consumes more than it produces. Even though import and consumption numbers have fluctuated in recent years, China has been increasing its stock levels over the years, adding to the demand. Going forward, China (and other emerging economies) may increase its canola consumption as an alternative biofuel, food and livestock feed source. Last but not least, like other agricultural commodities, in the long term, poor weather (such as prolonged droughts and excess rain) conditions due to climate change can certainly impact production, causing supply constraints and pushing upward pressure on prices.
Popular Ways To Invest In Canola — Pros/Cons of Each
Like some of the other agricultural commodities, you can’t really invest in physical canola. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Canola ETFs. Unfortunately, there are no ETFs or ETNs that focus solely on canola, but there are ETNs that invests in a diversified group of agricultural commodities, including canola. Because of this, you won’t have full and direct exposure to canola prices. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETF/ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Be sure to read the fine print & understand the risks and costs involved.
- Canola Stocks. Similarly, there aren’t really any public companies with business activities solely related to canola. However, there are companies that are involved in a number of different agricultural products, with some exposure to canola. That being said, if you choose to Invest in these companies, you aren’t directly following canola prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products & assets they have, what research & development they’re currently conducting, and potential expansion plans.
- Canola Futures Contracts. The Intercontinental Exchange (ICE) offers canola seed futures contracts. A standard contract deals with 20 metric tons of the stuff! These futures contracts are physically settled after the contracts have expired. As a reminder, futures contracts are binding agreements traded on futures exchanges between two parties where they agree to buy/sell canola at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in canola can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Like other oilseeds, canola is used in a variety of food and non-food uses, including industrial products, biofuels, and livestock feed. Because of this versatility, canola can be used as a hedge against inflation & for portfolio diversification. Demand for canola is global and is expected to increase, as evidenced by EU import and Chinese stock data from USDA reports. Furthermore, as with other agricultural commodities, climate change can certainly have an impact on production, causing supply constraints and putting upward pressure on prices. However, there are a number of risks associated with canola. Because of the recent price spike reaching levels not seen in decades, it’s likely that more and more factors will put downward pressure on prices in response to this. These include potential overproduction by Canadian suppliers, and slower export demand due to the high prices as well as the availability of other oilseed substitutes. Last but not least, canola prices can also be impacted by research that highlights the benefits or the harms in canola consumption.
🧺 If you are considering canola to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your canola position so you can take advantage of any volatility in the market.
💰 If you are considering adding canola for speculation and profit, you may want to monitor the factors that affect canola prices mentioned above. You may also want to keep track of monthly reports of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. Bear in mind that canola is referred to as rapeseed in the reports. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on canola’s price chart to help consolidate trends and patterns to help with your decision. That being said, as you can see in its price chart, its recent price spike is at levels not seen for decades, so proceed with caution should you want to add canola to your portfolio.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.
