Do you think much about fungibility?
Perhaps not always, but I suspect you’re now taking rather more than a passing interest in the academic question of how fungible Canada’s canola crop is.
After all, if you’re the average prairie farmer, canola is your most consistently profitable crop and likely the key to your future success or failure.
“The globe is round and commodities flow and are fungible,” Duanjie Chen, an economist and analyst with the Macdonald-Laurier Institute, writes in a research paper on China’s economic pressure campaign against Canada.
“China cannot diminish the global market for canola and other agrifood products.”
If she’s right, the pain western Canadian farmers are feeling from China’s canola blockade is probably at its greatest extreme right now as the disruptive effects of the sudden loss of Canadian canola’s biggest export market hammers the commercial flow of the product.
But that’s where the fungibility comes in. Something is said to be highly “fungible” if its demand is not dictated by a single or narrow use or user. If it loses a market, a buyer or a use, its inherent value means it will end up in other markets and with other buyers.
Canola is a valuable vegetable oil, with users and potential users around the globe, so China’s ability to permanently ruin Canadian canola’s worth is limited. That’s the bottom line of Chen’s argument for me.
(She acknowledges the current economic pain caused by China’s actions and the potential for more in the future, and calls on the federal government to compensate farmers for the political risks that now appear to be becoming a lasting element in the world’s markets.)
We’re already seeing this reality, with less than a year of the China blockade behind us. Canola hasn’t stopped flowing. It hasn’t run into a brick wall. It has found buyers and users.
It’s had to do that at the cost of discounted prices, which goes right back to the farmgate, but canola is still selling and moving.
If the blockade continues, the myriad efforts of canola merchants, commodity groups and federal government trade officials will find more buyers, entice more vegetable oil users, discover new ways of moving what is, after all, arguably the healthiest vegetable oil in the marketplace.
I asked market analysts about this reality and they weren’t surprised to find canola resilient in the face of the China situation, even if much of the apparent success this year is due to temporary factors.
“It doesn’t matter if it’s canola or copper,” said Errol Anderson of Pro Market in Calgary.
“When you throw tariffs or blockades in front of markets, it’s like a clogged river, and it will find its way. The market will re-establish itself.”
Ken Ball of P.I. Financial said canola markets faced a shock when the blockade was initially imposed, but very soon it was flowing again.
“It levelled off very quickly,” said Ball.
Canola prices fell, and it’s now “comfortably valued” versus other vegetable oils (read cheap), but that’s helped find it new buyers and a route to get out of farmers’ bins and off the Prairies.
The relative decline in canola prices caused by China won’t help canola profitability, but it might firm up the supply and demand economics as farmers scale down canola acres, analyst Greg Kostal told me. While this year’s canola market might not seem as bad as feared, there’s some good luck involved in that.
“We are lucky Europe has a crop failure to help cushion the China decline, but can’t count on that every year,” said Kostal.
If China and Canada don’t come to an amicable conclusion (to the current dispute), it won’t be demand that fixes the relative surplus of canola. It likely has to be further acreage and supply contraction in 2020.”
I ran a Twitter poll of farmers on the question of whether they were thinking of cutting canola acres next spring, and it looks like lots are considering doing just that.
So the situation with China is bad, but it won’t kill canola. And due to canola’s fungibility and farmers’ adjustment to the eternal laws of supply and demand, the impact of China’s blockade is likely to be far less destructive than many of us feared.
China has hit us with a nasty sucker punch, but now the shock is past, It’s possible to have a fair economic fight.
“The long-term prospects for our farmers facing China’s ban on our agriproducts do not seem as dire,” noted Chen.
“China’s bans of Canadian agriproducts will not change the global demand for those products, but only cause a disruptive shuffle between buyers and sellers. Such disruption will take time to resolve and will require costly adjustments, but our farmers and our economy will ultimately emerge from the fray still producing those products, and still finding markets in which to sell them.”