A forecast of slumping Chinese demand and increased export competition from former Soviet Union countries has one major oilseed analyst calling for a trimming of canola prices this year.
In its latest oilseeds outlook, the United States Department of Agriculture forecast a 650,000 tonne drop in 2008-09 Canadian canola exports compared to the year before. That’s in stark contrast to Agriculture Canada’s projection of a 100,000 tonne increase.
Mark Ash, agricultural economist with the USDA’s Economic Research Service, is skeptical about Agriculture Canada’s 5.7 million tonne export number.
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“We’re just not as bullish on China’s imports of canola,” he said.
The USDA predicts China will buy 700,000 tonnes of rapeseed and canola in 2008-09. Ash said that number would have to rise well beyond 1.25 million tonnes for Agriculture Canada’s forecast to make sense and he doesn’t believe that will happen given reports of a decent Chinese rapeseed harvest.
Dave Hickling, vice-president of canola utilization at the Canola Council of Canada, said China could easily import 1.5 million tonnes if there was tariff parity with soybeans. But there is a nine percent tariff on canola compared to one percent on soybeans and that gap isn’t going to be reduced soon.
The canola council does not make official supply and demand projections, but its internal export estimate is close to the USDA’s number.
“But we’re conservative by nature on that,” said Hickling, noting that the number is used for budget purposes because the council collects a levy based on tonnage sold.
Given that Statistics Canada is forecasting an 846,000 tonne increase in canola production and the USDA is projecting 650,000 tonnes fewer exports, there is a strong possibility carryover stocks will rise unless domestic crushers can consume an extra 1.5 million tonnes of seed.
“It will probably have a somewhat moderating impact on prices,” said Ash.
“But (prices) are still likely to be quite strong compared to years past.”
Last week, Statistics Canada revised its canola production estimate for 2007-08, increasing it by nine percent. That means there will be even more stocks to chew through.
Another bearish factor is that rapeseed exports from former Soviet Union countries are set to explode. Oil World projects a near tripling to 2.9 million tonnes in 2008-09, from 1.1 million tonnes last year.
“We’re not quite that high, but it’s the same general trend,” said Ash.
The USDA forecasts 2.4 million tonnes of exports from Russia and Ukraine, up from 1.05 million tonnes in 2007-08. Almost all of that product will end up in Europe with a little heading to Pakistan and surrounding countries, said Ash.
Canada could also face increased competition from Australia. The Australian Bureau of Agricultural and Resource Economics forecasts one million tonnes of canola exports in 2008-09, almost double last year’s program.
Hickling said Canada is already seeing reduced sales into Pakistan, which is on pace to buy less than half of what it did in 2007-08. But the industry has always known that the recent trend of boosted sales to places like Pakistan was fleeting. The opportunity came about because of successive droughts in Australia and favourable freight rates.
Despite the prospect of slumping demand from China and increased export competition in Indian Ocean and Persian Gulf markets, Hickling isn’t ready to throw in the towel.
“I’m not really that bearish right now,” he said.
He noted that Canada will have a record export program to the U.S. in 2007-08 and he is confident that market will grow next year as new biodiesel plants come on line. And the U.S. canola crop is forecast to be 16 percent smaller than last year.
Mexico should be a strong buyer as long as canola stays price competitive with soybeans and there is potential for new sales into Europe if the makers of GM canola get the long-awaited regulatory approval they’ve been seeking in that region.
“Definitely no doom and gloom,” said Hickling.
