Many brush off the effect of China’s de facto ban on Canadian canola, pointing to record prices and huge global exports.
But that’s a mistake, according to a new study commissioned by the Canola Council of Canada.
LeftField Commodity Research delved a bit deeper for the council and found that between March 6, 2019 and July 31, 2020 the ban cost Canadian growers an estimated $681 million to $1.3 billion.
Brian Innes, the CCC’s vice-president of public affairs, said in an interview March 10 that it’s easy to see high prices and assume all is well and the impact was negligible.
“What we don’t see is what could be on the table,” he said. “The report is about teasing out what’s happened and showing what never even appeared as value for Canadian canola.”
Why it matters: Canola is Canada’s most valuable crop and it’s very dependent on robust export markets.
In the 2019-20 crop year China imported 1.93 million tonnes of Canadian canola seed — almost half of the 4.1 million tonnes it imported on average during the previous five years, the study says.
The value of Canadian Canola seed exports to China fell from $2.8 billion in 2018 before China’s restrictions, to $800 million in 2019 and $1.4 billion in 2020.
That spurred the CCC to revise its Market Access Plan to prevent and resolve future restrictions on Canadian canola exports, Innes said.
As part of its plan the CCC is also asking the Canadian government to create an Asian Diversification Office.
“Led by experienced market access officers, it should consist of a multidisciplinary team including technical and regulatory policy experts that work collaboratively with industry,” the CCC said in a news release March 4. “It should be based in Asia with a pan-Asian mandate.”
On March 6, 2019 permits allowing Richardson and Viterra, Canada’s two biggest grain companies, to sell Canadian canola to China were suspended by China.
For a while, China eschewed Canadian canola from all Canadian exporters. While shipments by Richardson and Viterra are still blocked, exporters from Canadian companies have resumed, but remain much lower than average.
China claimed Canadian canola seed was infested with a canola disease and weed seeds — allegations Canadian regulators said lacked proof. Many observers believe China’s real motivation is punishing Canada for arresting Meng Wanzhou, chief financial officer of China’s giant telecom firm Huawei, in December 2018 at the United States’ request.
Proceedings into Meng’s extradition to the U.S. are ongoing.
Some also suspect China’s actions were intended to drive canola seed prices down. Whatever China’s intent, LeftField concludes that’s what occurred.
LeftField’s estimate of China’s impact on Canadian canola is not far off the $1-billion loss the CCC calculated in September 2020 based on multiplying the drop in canola seed exports to China by the drop in canola seed prices.
Some economists criticized that calculation as too simplistic. LeftField acknowledged determining China’s impact on canola prices is complex.
“Prices are continually responding to multiple influences,” the study says. “In addition, markets are dynamic and quickly adjust to new realities. This makes it difficult to isolate the longer-term value effect of the change of a single market dynamic, even if it’s a significant one. However, considering the problem from several angles may allow for some reasonable estimates.”
The LeftField study took into account the direct loss of opportunity from lower export volumes to China, changes in domestic canola prices in Canada, and Canadian canola price behaviour relative to other global locations.
“Each perspective may be useful in itself, but perhaps even more so when viewed together and considering instances where there may be cumulative and/or offsetting effects,” the study says.
The study estimates the net loss in canola export sales from March 6, 2019 to July 31, 2020 is between $859 million and $1.051 billion.
It notes that while Canada sold less canola to China, that canola still had value.
“The aggregate loss in canola value from March 6, 2019 through July 31, 2020 is estimated to range from $681 million to $1.304 billion,” the study says.
“Canadian canola exports to China essentially ‘hit a wall’ after the trade restrictions were announced. Volumes have subsequently improved, although still remain below what would have been considered ‘normal’ prior to the restrictions being implemented.”
The study shows Canadian canola seed exports to other countries went up, but concludes the prices received were lower because of the drop in sales to China.
“There are big customers who drive the market price… more than other customers,” Innes said.
The report outlines that China is such a huge buyer of oilseeds in the world — more than 50 per cent and sometimes as much as 60 per cent — that when a buyer that size and its demand is blocked from purchasing Canadian canola, that has an impact on the overall demand and price, Innes said.
“When you take a big player out of the market everybody pays less,” he said.
That’s translated into more “price-sensitive” markets like Bangladesh, Pakistan and the United Arab Emirates buying more Canadian canola over the past two years, Innes said.
“So if you just looked at the volume — product flows — it doesn’t necessarily flow at the same price it would if you had the major buyer of the world fully demanding our product,” he said.
Those unfamiliar with grain markets might assume with the March canola futures market hitting a record $852.10 a tonne ($19.32 a bushel), and cash prices of more than $17 a bushel that reduced sales to China don’t matter. But today’s prices don’t help those who sold earlier. In fact, high canola prices now reflect low supplies and most farmers won’t capture them.
Innes noted that the 2020 crop was the smallest in five years, meaning there wasn’t much to sell to begin with. Then record shipping in the fall moved more of the crop out earlier than ever before, which resulted in the current situation.
“There’s a lot of demand in the country and there’s not much left to sell,” he said.
Even though China’s purchases of Canadian canola fell to 50 to 70 per cent, depending on the period measured, its purchases of Canadian canola oil and meal remained relatively steady.
And it continues to be a major buyer of Canadian canola seed. So far this crop year, which began Aug. 1, 2020, China has imported 1.19 million tonnes, second only to the European Union at 1.27 million tonnes, based on Statistics Canada figures.
In calendar 2020, despite reduced imports, China was still Canada’s best export canola seed customer buying 2.58 million tonnes, just ahead of the EU’s 2.52 million tonnes.
Find the full market impact report on the Canola Council of Canada website.