Strong demand drives red lentil prices

Market Focus

Highlights

  • Gradual working-through of sales commitments in Canada is one of the many factors impacting the red lentil prices
  • Export clearances are also influencing red lentil prices
  • New export interest should come in the new year

After trending higher for past two months post-harvest, red lentil pricing appears to be losing momentum. So, what's happening? There are several factors at play.

- Australia is reportedly offering field run red lentils below $700 per metric tonne container landed India. As an example, Canadian origin container was trading into Pakistan in the US$750 to 775 per metric tonne range a month ago. Cheaper product from Australia dismisses talk that "too wet" weather compromised crop outcome.

- On Nov. 8, the India government initiated a demonetization regime. This involves removing rupee 500 and 1,000 notes from circulation with a redemption deadline of Dec. 30, 2016. As a result, short term financial chaos has escalated in that money supply has shrunk, and in doing so has hand-cuffed financial transactions. The impact will likely linger for a few more weeks anyway.

It's hard to be confident that 2017 price outcome can replicate in 2016, (but) strong demand attributes put red lentils in a position to be a crop margin leader.

- While lentil export clearances from Canada have been excellent, they don't appear as large as what could have been. Port congestion, capacity limitations (cars, containers, trans-load, financial), and not meeting shipment slots have incrementally contributed to sales cancelations. Activity with Western Canada in past one to two months has been just as much about servicing previously sold commitments as making new sales.

- Last week, the India government increased the red lentil minimum 16/17 support price to farmers to US$590 per metric tonne equivalent, up from US$510 per metric tonne last year. This is more psychological. There is no indication that farmers in India are cranking-up red lentil seeded area as other crop returns are reportedly superior.

- No matter the reason, world lentils prices have been hovering in a US$600-800 per metric tonne for over a year. That's roughly equivalent to a mid-20 to mid/high-30 cents per pound range locally.

- As winter sets in here, monitor success by which industry can use lower grade red lentils for what otherwise would've been a standard second grade. As well, watch attitudes towards India chickpea, lentil and field pea growing season. Known as rabi growing season, about 70 per cent of these crops are planted in November and harvested in March and April. A common perception embraced today is that conditions are good, but this can change in a heartbeat.

- Red lentils are best coined as a commodity that has large supply versus large demand. Each tends to have a price leadership moment whose momentum can last upwards of two months or so in each direction.

In summary, timing of cheaper Australian offerings, gradual working-through of sales commitments in Canada, excellent but not outstanding export clearances, traditional slowing down of business as holiday season approaches is overlapping with random timing of India government monetary action. The new year should bring about another batch of export interest to bridge importers with inventory until rabi harvest. 

Perception of India crop development at that time will go a long way to influence price trends. With rabi harvest poised to ramp up by late March, Western Canadian farmers can use that calendar point as a crucial piece of supply news to refine seeding intentions. While it's hard to be confident that 2017 price outcome can replicate in 2016, strong demand attributes put red lentils in a position to be a crop margin leader.

Greg Kostal of Kostal Ag Consulting Ltd provides insight on commodity markets and marketing guidance. For more information, please visit www.gregkostal.com.

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