Farmers probably don’t have to be too worried about China shutting the door to Canadian canola, say some analysts.
Not only is China unlikely to completely close the door, but there is also good demand around the world for the crop, the Chinese still want it and carryout supplies should be low again.
“I’m fairly optimistic about canola right now,” said Neil Townsend, an analyst at FarmLink Marketing. “I think there are a positives in the supply and demand balance.”
China has been threatening to impose a one percent dockage limit on Canadian canola. Canadian and Chinese officials are talking about it, and the issue is expected to be discussed during Prime Minister Justin Trudeau’s visit to the giant country, which is Canada’s best canola customer.
Some grain companies can probably meet the one percent specifications, but other exporters are likely to be leery of the dangers of rejected cargoes and could back away from making sales to China.
As well, the tight standard raises the worry that China might use the situation to deliberately block canola imports in order to have a domestic market impact.
Rich Nelson of Allendale, Inc. said few in the market are concerned about the Chinese situation.
“It’s not something which will really deter how much they are willing to buy,” said Nelson.
Chinese importers want the oilseed crop, which means they have an incentive to find ways to work around any new restrictions put in place, Nelson said. The government will probably try to find regulatory controls that it could use if needed, but it probably won’t act too severely.
“We all understand … that China in the past two years has taken a very proactive and destructive approach to its grain import policy, and this is yet another example of that,” said Nelson.
The Chinese government can use many tools to restrict imports, whether it is import tariffs, altered quality requirements or the issuing of licenses, but its processors need much of the crop they receive.
“It will restrict things, but it won’t stop them (if tough standards are imposed,)” said Nelson.
“Ultimately they want the canola because they use it,” he said.
Others want to use it too, which is why many analysts aren’t too concerned about the China situation. There is good overseas demand, and Canada’s recently expanded crushers want to feed the strengthening world vegetable oil market.
Some buyers were probably getting complacent about meeting their 2016-17 needs before the constant rains reduced the expected size of the coming crop, but Townsend thinks that is changing.
“They’re going to be a little bit more inclined to take ownership than they were 10 or 15 days ago, when they thought that they didn’t have to worry and could pick and choose when to buy.”
He expects the 2016-17 carryout to be “fairly tight,” so a reduction in Chinese buying won’t be a disaster if it occurs. It will buy at least three million tonnes, so any reductions would occur above that level.
Analyst Greg Kostal said China’s demand might shift around, but the impact on canola prices and movement would be muted in the world vegoil market.
“Whatever the official outcome, if it’s different than the status quo, trade will adjust,” said Kostal.
“It might change who may choose to participate, create a minor basis variance (which might already be built into prices), but canola is a global and fluid commodity.”
The bottom line from the three analysts is that canola should still have lots of buyers at home and around the world, and any impact on prices is likely to be moderate and indirect rather than dramatic and worth hedging against.