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Canola Trading


The Ultimate Guide

 

Why is Canola Valuable?

Canola is a crop grown primarily for its seeds, which can be crushed to produce canola oil and canola meal.

In the 1960s, Canadian scientists created canola by conventionally breeding rapeseed plants. The idea was to eliminate the undesirable properties of rapeseed oil and create a new plant with a better nutritional profile. The term canola is a contraction of ‘Canadian’ and ‘ola.’

Canola oil is one of the most versatile cooking oils and a healthy alternative to oils with higher saturated fat content. Canola meal is a staple in animal feed. These two products make canola an important global commodity.

How is Canola Produced?

Canola is a member of the Brassica family of crops, which includes broccoli, cabbage, cauliflower, mustard, turnip and radish.

The ideal habitat for growing canola is a grain farm with rainfall zones of between 450 and 700 mm, although newer varieties of the crop have been grown in drier climates. The crop has a similar profile to wheat, and farmers often rotate wheat and canola on their acreage.

Canola crops can be planted in the spring or winter. Spring canola grows in colder norther climates such as the US plains states and Canada. The crop is planted in rows in March and harvested in September or October. The slightly cooler summers in the northern growing regions allow the crop to prosper. Winter canola is planted in September and October and harvested in the spring.

Canola is considered a hardy crop that adapts well to variations in temperatures. As a result, it is grown in a wide variety of geographical regions in the United States, Canada and other regions of the world.

Canadian farmers began planting canola in 1974, and US farmers introduced the crop in 1988.  More than 80% of the canola in the United States is produced in the state of North Dakota.  Other key producing states include Oklahoma, Montana, Washington, Minnesota, Kansa and Idaho.

Canada is the world’s largest single country producer of canola. It produces more than 25% of the global supply of canola and leads the world in exports. The European Union also produces a significant amount of canola.

Where is Canola From?

Map showing the countries that produce the most canola

Top 5 Canola Producing Countries

RankCountryAnnual Output (in metric tons)
#1Flag of CanadaCanada15,500,000
#2China14,700,000
#3Flag of IndiaIndia7,800,000
#4Germany6,250,000
#5France5,500,000

Canola production has risen sharply since the crop’s introduction. Growing demand for vegetable oils in India and China have contributed to this demand as has growing demand for canola in biofuels. The United States, China, Japan, Mexico and Pakistan are the largest consumers.

Top 3 Uses of Canola

UseDescription
Canola OilIts favorable nutritional profile makes canola a popular choice for sauteing, frying and baking.
Canola MealThe canola meal that remains after oil extraction can be crushed and prepared as animal feed for poultry, pigs and cattle.
Non-food IngredientCanola is used in the follow non-food products: Canola is used in the following non-food products: Biodiesel, Printing inks, Cosmetics, Toothpaste and more.
Images via Wikipedia and Pixabay

What Drives the Price of Canola?

  1. Canadian Market
  2. The US Dollar
  3. Emerging Market Demand
  4. Substitution
  5. Biofuel Demand
  6. Health News

Canadian Market

Canada produces the largest share of the global supply of canola, so events in this country can have an important effect on prices.

Extremely cold or warm temperatures can limit crop production. Also, decisions about how to allocate acreage for crop production can impact prices. If farmers believe the price prospects for wheat, for example, are more favorable, then canola production might suffer. This could send prices higher.

The US Dollar

The US currency is the world’s reserve currency. As a result, canola and other commodities are quoted in US dollars. Canola growers receive fewer dollars for their crop when the US currency is strong and more dollars when the currency is weak.

Emerging Market Demand

Emerging market countries such as China, Mexico and Pakistan import significant amounts of canola oil, and consumption has been gradually growing over the years. As these and other emerging economies expand, their demand for agricultural commodities will grow. Increasing wealth will also likely mean increased consumption of meat. Since canola is used to produce livestock feed, this should also boost prices for the commodity.

On the other hand, a global recession or severe emerging market slowdown could limit demand.

emerging markets map
Many emerging markets are large consumers of canola oil. Image via Wikipedia

Substitution

Oil produced from canola meal competes with many other oil meals including castor, soybean, linseed and cottonseed. The demand for these meals will fluctuate mostly based on price and availability.

Perception about health benefits could also impact the relative demand for different oils and oil meals.

Biofuel Demand

Surging demand for biofuels has contributed strongly to demand for canola.

The European Union has not been able to produce enough canola for its biodiesel needs and imports the crop from Russia and Ukraine. The two countries have ramped up production, but as more consumers turn to biofuels, supply may not be able to keep pace with demand.

Health News

Canola growers tout the many benefits of canola oil consumption including its low saturated fat and high omega fats profile. They call it the world’s healthiest cooking oil.

However, canola oil has its controversies. Some health experts warn that canola oil is really just modified rapeseed oil. Rapeseed oil has traditionally been used for industrial purposes such as in lubricants. It contains harmful substances such as erucic acid, which may cause heart damage.

In addition, around 90% of the global canola crop is genetically modified, and many scientists believe consuming genetically modified products can cause diseases.

As more information becomes known about the positive and negative health effects of canola, consumption patterns may change.

Reasons You Might Trade Canola

Traders purchase agricultural commodities such as canola for many reasons, but the best reasons to buy include:

  1. Inflation and Weak US Dollar Hedge
  2. Bet on Demand Growth

Inflation and Weak US Dollar Hedge

Trading canola is one way to bet on a weak US dollar and higher inflation. Since agricultural commodities including canola get priced in US dollars, the performance of the US currency plays a crucial role in their pricing.

The US Federal Reserve Bank has generally pursued accommodative policies that have kept the US dollar weak. If US central bankers continue these policies, then agricultural commodities could see significant gains. Consumers concerned about protecting their purchasing power should consider investing in agricultural commodities. A weak dollar could stoke inflation concerns and raise canola prices.

Speculate on Demand Growth

Canola prices should perform well if the world economy grows at a strong rate.

Demand from emerging market economies could be the catalysts for significantly higher agricultural commodity prices. As these countries become richer, they will probably increase their demand for livestock feed and oils. Canola prices should benefit from these trends.

Demand in the developed world may also outstrip supply in the coming years. Factors such as growth in biodiesels could contribute to this demand.

Should I Trade Canola?

Traders who want exposure to canola prices might want to consider buying a basket of commodities that includes other agricultural staples such as wheat, corn, barley and soybeans.

For additional diversification, they may want to trade in other commodities including metals and energy. Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to an investment portfolio.

Canola is arguably an attractive commodity to consider trading. There are four specific trends that could boost canola prices in the years ahead:

  1. Emerging market demand
  2. Climate change
  3. Biofuels
  4. Health issues

Emerging market demand

The development of emerging economies could boost canola demand. As people in these countries accumulate wealth, they will probably start eating a more varied diet. The demand for livestock feed and canola oil may see significant growth.

Climate change

Global warming trends have the potential to seriously disrupt the production of many different crops including canola. If recent weather patterns continue, the world’s supply of food may not be able to meet demand in the years ahead. Trading agricultural commodities is a way to benefit from this trend.

effects of climate change
Climate change may disrupt the production of crops like canola. Image via Wikipedia

Biofuels

The growth in biofuel consumption could lead to significantly greater demand for canola. The European Union is unable to meet its demand and is turning to Eastern European countries for its supply.

Health Issues

Canola is seen by many medical experts as a heart-healthy alternative to other oils with higher saturated fat content. The American Heart Association has added a new liquid vegetable oil category to its Heart-Check Food Certification program, and canola oil is on the list. More positive press about the health benefits of canola could lead prices higher in the years ahead.

However there are some risks to trading canola that should be considered:

  1. A strong US dollar could drive prices lower.
  2. Overproduction by large suppliers and exporters such as Canada could depress prices.
  3. Bad news on the health front could weaken consumer demand for canola products.

What Do Investment Experts Think About Canola?

Canola - what do the experts think?

Experts see both potential risks and pitfalls from trading canola.

“We’re definitely optimistic on grains and oilseeds.”

James Cordier, president and head trader of OptionSellers.com

Jim Rogers interviewed on The Street
Jim Rogers discusses commodities on The Street. via YouTube

“I’m still extremely optimistic about agriculture, more so than many sectors of the world economy.”

Jim Rogers, creator of the Rogers International Commodity Index

However, Canadian officials present a more muted outlook for canola. Although the Canadian farm ministry cut its harvest forecast, the country still produces record amounts of canola crops. Improvements in crop strains are the primary reason for this abundance.

“Historically, the hybrid varieties grown across Western Canada proved to be remarkably drought tolerant.”

Canadian Farm Ministry

How to Trade Canola

Unfortunately there are a limited number of ways to trade canola:

  1. Futures
  2. Options
  3. Stocks of Canola producers
  4. CFDs

Canola Trading Methods Compared

Method of InvestingStorage Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Soybeans FuturesNYNYY
Soybeans OptionsNYNYY
Soybeans SharesNNNYY
Soybeans CFDsNNNYY

Canola Futures

The Intercontinental Exchange (ICE) offers a contract on canola that settles into 20 metric tons of the commodity.

The contract trades electronically and has expiration months of January, March, May, July and November.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.

At expiration, the contracts are physically settled.

Trading futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Canola Options

The ICE offers an options contract on canola futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of canola futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in canola futures to profit from their trades.

Canola Company Shares

There are no pure-play public companies engaged exclusively in the production and sale of canola. However, these three diversified, publicly traded agribusinesses offer some exposure to the sector:

 Current PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact

Archer Daniels Midland
US food processing and agricultural commodities trading companyNew York (NYSE)190232,000+Fortune magazine named ADM the World's most-admired food production company 2009-2011

Bunge
Global agribusiness and food company incorporated in BermudaNew York (NYSE)181832,000The world's number one seller of bottled vegetable oil to consumers
Glencore
International commodity trading and mining companyLondon (LSE)1974200,000+Company began as a metals and oil company

The list is intended for information purposes only and inclusion here does not constitute investment advice.

Canola CFDs

A popular way to trade canola is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of canola. The value of a CFD is the difference between the price of the commodity at the time of purchase and the current price.

Traders deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to canola prices without having to purchase shares, futures or options. There are a number of regulated brokers who offer CFDs on canola. Selecting the right broker is no easy task.

To save you some time, we compared dozens of brokers on 10 key factors such as reputation, safety, fees and account requirements (see full list).

Based on our extensive research, IG stands out as our choice to trade canola/rapeseed CFDs.

Start Trading Canola CFDs today
*Your capital is at risk

With over 185,000 active clients worldwide, IG Markets has been recognized as one of the undisputed leaders in the retail brokerage space. IG Group plc has been in business for over 40 years and has a reputation for reliability and professionalism. IG Markets operates globally across five continents. It falls under the regulatory jurisdiction of several agencies where it operates.

RegulatorCountries CoveredProtection OfferedAdditional Protection Offered
Financial Conduct Authority (FCA)UK, Austria, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechenstein, Lithuania, Luxembourg, Malta, The Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden.All client funds are held in a segregated client bank account.Financial Services Compensation Scheme (FSCS) may cover up to £50,000 if IG fails.
Australian Securities & Investments Commission (ASIC)Australia, ChinaIG fully segregate all client money and all net-running profits of clients.
Financial Service Providers Register (FSPR)New ZealandIG fully segregate all client money and all net-running profits of clients.
Financial Services Agency (FSA)JapanAll client funds are held in trust which is managed by a certified public accountant.
Dubai Financial Services Authority (DFSA)United Arab EmiratesAll retail and professional clients money is held in segregated client bank accounts in accordance with the DFSA's client money rules.
Swiss Financial Markets Supervisory (FINMA)SwitzerlandAll client funds are held in a segregated client bank account.
Monetary Authority of Singapore (MAS)SingaporeAll client funds are held in segregated accounts at regulated banks.
Commodities market page from IG.com
Commodities market page from IG.com

 

Step-by-step for finding canola/rapeseed in IG
How to find canola/rapeseed in the IG platform

This is an example trade NOT a recommendation

how to open canola position on IG
How to open a canola/rapeseed position on IG
how to close canola position on IG
How to close a Canola/Rapeseed position on IG

Reasons to trade with IG

  • Regulated broker – your deposit is safe
  • More commodity markets on offer than most other brokers
  • Easy account opening process
  • Low minimum deposit of $200
  • Best Trading Platform 2017 – Online Personal Wealth Awards

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