How fungible is canola?
We’re about to discover that this year.
Canadian canola’s prospects still look poor due to the diplomatic standoff with China, but the situation doesn’t feel as dire as it was in March, when the Chinese blockade was imposed.
Some of that is due to the recent rally in canola futures, which shows that even under the cloud of China, canola is still attached to the rest of the vegetable oils complex, headed by American soybeans.
Soybeans have rallied on fears that the same wet weather that has ravaged the U.S. corn crop will also hurt soybeans, even though soybeans are much tougher in the face of saturation and lateness.
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While new crop soybean futures have rallied a buck a bushel, canola has risen but lagged the size of soybeans’ gain. That’s surely a sign of the China situation. Canola futures have given up some of the recent gains, but that’s due to the rains that bathed much of Western Canada’s canola acreage in the past two weeks.
But canola is still selling. China isn’t everything. Canola is a commodity with an inherent value. Chinese buyers have valued it highly in recent years, and we’ve lost them for now.
But it also has a value to other buyers in other places. It’s fungible. It’s substitutable for other canola crops and other vegetable oil crops.
Canada’s canola salespeople have been busily knocking on doors around the globe, finding which potential customers might actually be willing to sign on the line that is dotted.
As one canola market expert always says when I ask him about how and where Canada’s canola crop will get cleared, “canola is just a vegetable oil option.”
When China began blocking new purchases of Canadian canola, there was a market disruption. The expected flow of real physical product was blocked and crop backed up, all the way back to the farm.
But now that we’re a few months into the blockade, commercial shippers and marketers have had a chance to knock on a lot of doors they have neglected in recent years, and we’ll soon see who now sees a chance to swap in Canadian canola for something else they have been buying.
Moving crops to secondary markets will be a relief as another crop looms, but it won’t come for free.
“You can definitely find a home for it, but it’s going to be at pretty cheap prices,” one broker told me last week.
“The commercials know their business. They know the world. They know where to go.”
Canola prices will probably lag some other vegetable oil crops as long as the China crisis lasts. But the crop will probably move. It’ll be interesting in coming months to see where the statistics say it’s finding a home.
This is an unfortunate and costly situation for farmers, but it looks in retrospect like China has never been a safe bet as a market. If the country is willing to freak out this severely about Meng Wanzhou, it was always one spark away from exploding. It’s good we know that now.
And it’s good we’re learning who we can turn to when things go back with China. We’re going to need that knowledge in the future, no doubt.
