Over-dependence on one volatile market is a problem

Canola prices have fallen to around the same low level they hit the last time we were having trade issues with China back in the summer of 2016.

Back then, China’s concern was the level of dockage and its potential to raise the introduction of blackleg disease.

The Chinese are being less specific this time, alleging contamination with unnamed pests or bacteria, and are saying that they need to more closely inspect shipments. They have cut off Richardson International’s access, alleging its shipments had excessive weed seed.

But likely China is holding canola hostage, not to mention holding two Canadians in China, to show its anger over Canada’s handing of the arrest and extradition hearing of a top executive of Huawei, the Chinese high tech giant.

Growing trade with China has been the defining characteristic of the global market for more than a decade but there might be more trouble in the future as China’s ambitions increasingly conflict with western dominance.

Xi Jinping, China’s president who has centralized power in himself, is plotting a more ambitious role for his country in world affairs and American President Donald Trump wants to set up roadblocks so as to preserve America’s economic and political leadership.

A new cold war of a sort is establishing.

This geopolitical clash sometimes causes collateral damage and Canada is now suffering as its extradition court tries to figure out what to do with Meng Wanzhou, Huawei’s chief financial officer and the daughter of its founder.

The United States accuses Meng and the company of fraud to circumvent U.S. sanctions on Iran. It wants Canada to turn Meng over to American authorities so they can try her in a court.

Also, national security experts allege that because Huawei has close ties to China’s government, its growing activity in the business of bringing 5G digital networking to the market presents an opportunity for Beijing to spy on western countries. The U.S. and other countries are moving to block Huawei from working on their 5G networks.

China argues that Washington is simply trying to limit China’s ability to build its high technology sector and compete against American and other western firms.

Now that Canada’s department of justice has decided an extradition hearing is appropriate, the process could drag on for months and so canola trade could also be affected for a long time.

China has been the leading market for Canadian canola since 2012 and its demand was particularly strong in the first half of this crop year.

To the end of January exports to China accounted for 46 percent of all Canadian canola trade, up from 37 percent last year at the same time. This was tied to the U.S.-China trade war, where China was not buying American soybeans. To partly fill the gap, China bought more canola. Also, the trade war had lowered the cost of U.S. soybeans and they were capturing some market share away from canola in countries other than China.

With canola’s latest price decline associated with the news about Richardson, canola is now very competitive with soybeans, so that might mean new business can be done with customers who have been light this year, such as the United Arab Emirates and Pakistan.

The domestic crushing industry could also increase activity as the canola crush margin improves strongly in their favour.

The price might be weak, but with luck Canada can avoid a situation where canola ending stocks greatly increase.

In February, Agriculture Canada forecast year-end stocks at 2.5 million tonnes, similar to last year and 2017-18. At this point, most prairie farmers have seeding plans in place and so they are unlikely to make huge changes to their canola acreage expectations.

And it is not like there are attractive alternatives. The hoped-for increase in wheat prices has not happened because Russia has not run as short on supply as some analysts thought.

Also, the U.S. dollar is appreciating against many currencies, reducing the competitiveness of its wheat and hurting its exports

Chicago and Kansas wheat futures are down about 17 percent since the beginning of February. Minneapolis spring wheat is holding up better and is down only about five percent.

General weakness in commodities is also holding crop prices down.

Many big investment funds are not sure that a breakthrough in the U.S-China trade war is near. They have moved into short positions on commodity markets on thoughts that the trade problem is slowing global growth and therefore slowing future demand for commodities.

Getting back to worries about an evolving cold war, a major difference this time is that unlike the old Soviet Union, whose economic power never matched its military might, China is the world’s second largest economy and is fully enmeshed in global trade.

Instead of gunboat diplomacy, it can flex its economic muscle, controlling access to its vast market, its enormous exports and billions to invest.

Canadian agriculture has made a huge effort to gain markets in China and has reaped profits from that, but the market might become more volatile. All the more reason to continue to expand our market development efforts to diversify the list of buyers and spread the risk around.

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