Expect an extra one million tonnes of canola demand from China in 2017-18, say two exporters.
Two large soybean crush facilities are being converted into canola processing plants and a third could follow suit.
Late last year, the Chinese government granted approval for a switch plant located along the Yangtze River in Nantong, China, to start processing canola.
Bunge is also on the verge of receiving final permits to switch its soybean plant in southern China to processing canola. The approval is expected by the end of May.
Jarrett Beatty, trading manager with Parrish and Heimbecker, believes the two new plants will boost Chinese demand to five million tonnes in 2017-18 from an estimated four million tonnes this year.
The lion’s share of that additional demand will go to Canada.
A third switch plant has put in an application with the Chinese government, but it’s uncertain where that sits in the approval process. If approved, it would boost demand even further.
Beatty said the plants would switch back to soybeans if canola proved unprofitable, but it is not a trivial process to flip back and forth, and given that the companies that own the plants made the investment to switch to canola processing, he doubts they will go back to soybeans anytime soon.
“Their intent for these plants is to crush canola going forward. It’s a good news story, for sure,” he said.
“You’re really seeing China establish itself as the premier market for Canadian canola seed.”
As well, there is potential for more switch plants to start focusing on canola because it has proven more profitable for crushers than soybeans over the long term.
“I don’t think it ends here,” he said.
Glen Pownall, managing director of Peter Cremer Canada, agrees with the assessment of an additional one million tonnes of annual canola demand from China.
However, the market is quiet at the moment. End users are well covered for old crop through August, and there hasn’t been any new crop interest for months be-cause of poor margins in China’s canola crushing sector.
Margins are poor because Canadian supplies of old crop canola are tight, driving up the cost of seed, and because the Chinese government has been auctioning off its substantial reserves of rapeseed oil.
Pownall is forecasting a small export program to China through August because of the rapeseed oil auctions, but he believes demand will pick up once Canada starts harvesting its 2017 crop because the Chinese government has already put a big dent in its reserves.
“They went through a lot. I think the balance of what they have they will hold onto for a while,” he said.
Pownall’s margin calculations indicate that switch plants are better off crushing soybeans right now.
However, the dynamic will change once the Chinese government stops flooding the market with its stocks of domestic rapeseed oil.
“We are hoping that by the time our harvest comes around those stocks will be more under control and we’ll be able to start putting lots of canola into China to serve all of the crush capacity that has been added,” he said.
It appears as though the supply will be there to meet the additional demand. Canadian growers told Statistics Canada they intend to plant a record 22.4 million acres of canola, up 10 percent from last year.
Pownall said the market appears to be well balanced for 2017-18.
There is not going to be a lot of Chinese rapeseed to compete with imported canola from Canada and Australia.
According to a story on china.com, a report published by the derivatives research centre of the Orient Futures calls for Chinese rapeseed production to fall below four million tonnes, down from 4.6 million tonnes last year.
That is much lower than the U.S. Department of Agriculture’s 2016-17 China canola estimate of 13.5 million tonnes.
Pownall said the USDA number is out to lunch because it is based on a Chinese government estimate that is laughable.
He believes the 4.6 million tonne estimate and thinks it will remain around that level this year.
“That’s what I’m assuming right now until they start getting into the fields and harvesting,” said Pownall.
It does not matter what the number is because small processing plants in the country’s interior consume most of China’s production. Very little makes its way to the port facilities that rely on imported canola.