Here are some random observations on canola, China and grain markets overall. No conclusions, no solutions, just food for thought.
First, given the loss of our biggest export customer for canola, it’s surprising that the price drop hasn’t been more precipitous. Canola prices have certainly declined, but there weren’t a bunch of limit down days in succession like might have been expected when the bad news about China became public.
If you were watching the markets and not listening to news reports, you would have certainly noticed the weakness in canola over the past couple months, but you might not guess such a monumental shift in export potential had suddenly occurred.
Yellow pea prices have also been dropping and that may be due in part to fear that China may target Canadian peas next. Wheat prices have also been dropping, following the lead of Minneapolis futures and that may be partly due to the expectation that some canola acres could be switched to wheat this spring.
Of course, the question now is whether canola has reached some sort of equilibrium or whether it’s going to continue ratcheting lower. For fall delivery, prices of around $10 a bushel can be locked in, and while that’s disappointing relative to what was previously available, it does provide some protection in case there’s further downside.
Assuming the market has dropped a dollar a bushel because of China, that’s a loss of $40 or $45 an acre for the average canola producer, a huge financial hit in the many regions where canola is 40 or even 50 percent of the cropped acreage.
While we talk about China as our largest canola customer, that isn’t really true. The domestic crushing industry is the biggest customer, taking nearly 50 percent of total production. Chinese purchases have been 40 percent or more of seed exports. That’s roughly 20 percent of total production.
The loss of China is still a huge market disruption, but we’re really lucky to have 14 major crush plants across the country turning canola into oil and meal and accessing various markets around the world, the most important of which is the United States.
It should also be noted that trade patterns change in response to new market conditions. Will some Canadian canola be routed through the United States and arrive in China as American canola? Will the lower canola price encourage additional purchases by other nations?
Everyone is waiting to see what happens to canola acreage this spring. Most observers expect a decline with estimates ranging from a couple percentage points to as much as 10 percent. Canola is such a major crop in Western Canada that even a small change in the percentage is a lot of acres.
With seeding just weeks away, most producers seem to be sticking pretty close to their original plans. Canola seed has been bought or at least a purchase commitment has been made. And while $10 canola would be disappointing, many other cropping options aren’t stellar either.
The recent price declines in yellow peas and wheat will likely limit any further acreage upside on those crops. Oats and barley continue to look relatively strong and they may capture much of the late acreage swing out of canola.
To state the obvious, the loss of the Chinese market for canola has wide-ranging ramifications.
