Reduced biodiesel demand in Europe was expected to slash exports there, but new USDA report paints different picture
Slumping European Union biodiesel demand won’t completely destroy what has become a thriving market for Canadian canola, according to some new estimates.
The EU has emerged as a top buyer of Canadian canola, purchasing 1.39 million tonnes through the first eight months of 2019-20, which is more than five times year-ago levels.
In fact, it is Canada’s second-largest canola customer this year, ranking behind Japan’s 1.46 million tonnes but ahead of China’s 1.16 million tonnes.
There are growing concerns that the EU market could be drying up in the new crop year due to slumping biodiesel production caused by COVID-19 travel restrictions.
Not according to the United States Department of Agriculture. It forecasts a 200,000 tonne increase in EU rapeseed/canola imports to six million tonnes in 2020-21, according to a report released last week.
Jon Driedger, analyst with LeftField Commodity Research, thinks that seems optimistic but he noted that the USDA estimates are as credible as it gets.
He recently prepared a report on the EU biodiesel market that was released before the USDA’s report.
Driedger said the natural inclination is for canola farmers to panic when they hear that EU biodiesel production was down 50 to 60 percent in March and April because they think that means an equivalent drop in exports.
But when he drilled down into the numbers the situation is not nearly that dire.
“We have a less pessimistic view as we walk through it,” he said.
Driedger believes EU diesel consumption is going to slowly work its way back to a “new normal” of about 90 percent of previous fuel demand.
He estimates total biodiesel production could be down 15 percent in 2020, but that doesn’t necessarily equate to a 15 percent drop in rapeseed/canola demand.
That is because rapeseed accounts for 39 percent of the EU’s biodiesel feedstock. Some of the alternative feedstock ingredients will likely be hit harder by reduced demand for the alternative fuel.
For instance, 20 percent of the feedstock is used vegetable oil and cooking oil. Supplies of those two commodities will be severely restricted due to vastly reduced restaurant traffic.
In 2019, the EU’s biodiesel sector consumed about five million tonnes of rapeseed/canola oil or 12.5 million tonnes.
Driedger said it is reasonable to assume a five percent or 625,000 tonne reduction in rapeseed/canola crush for the sector in 2020-21. That will come directly out of imports from Canada and Ukraine.
The EU is forecast to produce 17 million tonnes of rapeseed in 2020-21, which is identical to last year’s output but 16 percent below the five-year average.
“Poor weather and the continued ban of neonicotinoids have negatively affected rapeseed area,” stated the U.S. Department of Agriculture in its report.
Driedger assumed the 625,000 tonne reduction in crush would mean a similar-sized reduction in imports given no change in the EU’s production.
That’s why he has trouble believing the USDA forecast calling for a 200,000 tonne increase in imports.
His original hypothesis was that a good chunk of the reduction could come out of Ukraine’s share of the imports.
He has heard forecasts of 2020-21 Ukrainian canola production in the two to three million tonne range, down from 3.46 million tonnes this year.
But the USDA surprised everyone with its estimate of four million tonnes of production. It believes Ukraine’s exports will increase by 400,000 tonnes in 2020-21 to 3.4 million tonnes.
If the USDA is correct, there would likely be a 200,000 tonne decline in Canadian canola exports to the EU as the 200,000 tonne increase in EU imports would be more than offset by a 400,000 tonne increase in Ukrainian exports to nearby EU.
The USDA also forecasts a big rebound in Australian production and a 300,000 tonne increase in its exports to 2.1 million tonnes in 2020-21.
Australia ships a lot of canola to the EU but Driedger said it is unlikely that Australia’s non-GM canola will find its way into the biodiesel market due to the price premium for the commodity.
China is the wildcard on the demand side. The country surprised analysts by purchasing 367,800 tonnes of Canadian canola in March.
It was Canada’s top customer by a long shot that month, more than doubling its monthly average for the 2019-20 crop year.
“I’m not sure this is a new normal,” said Driedger.
“That might be a little bit optimistic.”
But there is a distinct possibility that China could more than make up any potential looming slack in EU demand, he said.