China trade report tells troubled tale

Canola growers face a grim 2019-20 as the crop fights to find buyers in a saturated North America and messed-up world market.

It not only will be hard for farmers to move the crop, but prices will likely be disappointing, concludes the China Trade Report by Glacier MarketsFarm.

“North American oilseed prices will continue to push lower as long as stocks remain at record levels. Unless there is a severe weather issue in 2019, prices are not expected to rebound significantly,” says the report, authored by market analyst Robert Li.

“Canola ending stocks are likely to remain at burdensome levels through the 2019-20 crop year.”MarketsFarm estimates 2018-19 ending stocks of 4.67 million tonnes and 2019-20 ending stocks of 4.49 million tonnes. That is a huge increase from 2017-18’s 2.5 million tonnes and at about 25 percent of Canadian production, enough to hang over the market and linger unless something dramatic happens to another of the world’s major vegetable oil crops.

The report expects to see much of the impact from China’s effective ban of canola in commercial activities and statistics that will only become clear in coming months. China did not immediately end imports of Canadian canola, soybeans and peas after Huawei executive Meng Wanzhou was arrested in late 2018, allowing shipments already contracted to reach and enter China. That meant that Canadian exports to China only began to look bad in March, and as old deals are cleared up, new ones are unlikely to be made.

Canadian soybean sales to China had also been soaring in 2018-19 as Chinese buyers looked to Canadian supplies to replace American supplies that China was resisting, but that trade is ending.

The situation is worsened by the epidemic of African swine fever ravaging the gigantic Chinese swine herd, which consumes much canola and soybean meal. With many expecting China to lose around 30 percent of its pigs, demand for feedgrains is slumping.

That will leave lots of canola lying around on the Prairies. It won’t be easy to move because of the large amounts of soybeans presently backed-up inside North America, due to the United States-China trade war, with millions of tonnes more to end up in store once American farmers grow the 2019-20 crop.

MarketsFarm guesses that U.S. President Donald Trump will not reach a deal with China to fix its trade war soon, which will then probably kick the dispute past the 2020 U.S. elections.

“The loss of the Chinese market will push canola prices lower to try to regain other traditional markets,” said the report.

“The message is clear: sell canola and soybeans on rallies, even if prices are not what they have been in recent years.” Regardless of when the Canada-China and U.S.-China disputes are resolved, the trade flow disruptions are exacerbating an ongoing negative trend for North American farmers: the rise of South America as a preferred supplier. That continent’s ability to supplant North America’s vegetable oil crops in the giant Chinese market have been boosted by the blocking of U.S. soybeans and Canadian canola.

“The expansion of the Brazilian area has definitely hurt the U.S. market share in China. The trade war has just sped up the process of transferring acreage from North America to South America.”

MarketsFarm sees the biggest threat to Canadian canola coming from buyers switching to soybeans and other vegetable oil crops, rather than competing canola exporters.

“China can’t simply import rapeseed or canola from other countries to replace Canadian canola. It’s most likely that the crush plants at coastal areas in southern China would have to stop running or switch from canola to soybeans.”

Farmers should be preparing for a tough 2019-20, MarketsFarm says.

“Resolution could be a matter of years, not weeks or months,” says the report about the diplomatic standoff.

“Due to this and other factors, farmers are wise to hunker down for a prolonged period of low prices.”

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