Defaults on flax may spark oversupply

Chinese flax importers are defaulting on shipments, which will result in higher carryout and lower prices, says an exporter.

“The buyers aren’t just defaulting on the small guys or the medium guys like myself, they’re defaulting on all the majors, so it’s not a good situation,” said Kevin Price, senior manager with Agrocorp International.

He believes this year’s sluggish export program will result in 200,000 to 250,000 tonnes of carryout at the end of 2015-16, which is more than double Agriculture Canada’s forecast of 100,000 tonnes.

“We might get into a scenario where we’re going to see flax at a lower price than canola actually this year. That’s my gut feeling,” said Price.

Chuck Penner, analyst with LeftField Commodity Research, has heard the same story from enough traders that he too is increasing his ending stocks number.

He believes it could be as high as 300,000 tonnes if Saskatchewan Agriculture’s 23 bushel an acre yield estimate proves accurate.

Shipments to the European Union will also be down because of stiff competition from the Black Sea region. Kazakhstan harvested a bumper flax crop, and Russia exported a record 84,000 tonnes in September.

Growers in the United States also harvested a bigger crop than last year, forcing prices in that country down to C$10 per bushel.

“If there is a floor maybe that’s where the floor is, is around $10,” said Penner.

“But flax farmers are kind of like canaryseed and mustard growers. If they don’t like the price, they’ll just lock up their bins.”

Price said China is still working its way through an oversupply of the crop it imported in 2014-15.

Importers bought 353,052 tonnes of Canadian flax that year, up from 245,556 tonnes the previous year and 158,331 tonnes three years ago.

Price expects Canada’s export program to China to revert back to 250,000 tonnes this year as importers work their way through the excess Canadian supply.

There were 80,000 tonnes sitting in Chinese ports for a long time. Those stocks have fallen to 35,000 tonnes in recent weeks, but it is still too much supply.

Price estimates that Chinese importers have defaulted on contracts with six medium-sized Canadian exporters and another two or three of the big players.

Exporters thought the excess supply would have been mopped up by now, but importers are waiting for the floor in flax prices, which have been dropping at a steady rate of $10 per tonne, or 25 cents a bushel, for the past 10 months.

Buyers do not want to take delivery in a falling market, which has pushed inferred usage down by 10,000 tonnes a month.

Chinese importers are also finding it difficult to obtain credit because most of them lost money last year importing commodities in a falling price environment.

“They need cash flow, so they need to sell (flax) right away, and they’re forcing it onto the market, which is pushing the market down even more,” said Price.

The U.S. and the European Union are the only two viable alternative markets when Chinese importers default on contracts.

However, Penner said the EU will be well supplied by Black Sea flax, which leaves Canadian exporters in a pinch. It’s why Price is projecting less than 700,000 tonnes of total exports, down from Agriculture Canada’s forecast of 800,000 tonnes.

His Canadian acreage, yield and total supply forecast is closely aligned with Agriculture Canada’s. Price believes growers achieved an average yield of 21.5 bu. per acre on the 1.7 million acres they seeded. Supply will total one million tonnes when carryout is included.

Flax looked to be in trouble early in the summer, but like canola it benefitted from the late-season rain more than other crops.

Healthy supply and lacklustre demand are producing prices for No. 1 flax of $11.25 per bu. in Alberta and $11 in Saskatchewan. Not much business is happening at those prices.

“The grower expectations are still above $12,” said Price.

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