The world’s top grower of canola crops used to make cooking oil and animal feed is about to lose its biggest export market, just as farmers prepare one of their biggest harvests ever.
Canada -- where canola was invented four decades ago by scientists who bred out undesirable traits in rapeseed plants -- has become increasingly reliant upon sales to China. The Asian country boosted purchases 10-fold in the past decade and now accounts for 40 percent of shipments. But as of Sept. 1, China will impose tighter certification standards on imports of the commodity that may all but halt exports valued last year at C$2 billion ($1.55 billion).
China, which is importing more food as its economy grows, wants to further cut the trace amount of foreign material in shipments to limit the risk of spreading infections to its crops. Canada says additional cleaning is costly, unnecessary and won’t be any safer because seeds would then be exposed to other kinds of contamination. Without a compromise, the dispute spells trouble for canola futures that already are down 13 percent from a 33-month high in May.
“Taking a C$2 billion customer off the market, that could mean absolute hell for prices, especially as we’ve got this large crop coming in,” said Norm Hall, who farms 1,600 acres of canola in Wynyard, Saskatchewan, and is president of the Canadian province’s Agricultural Producers Association. “How far down is this going to drive the price?”
The prospect of fewer exports comes just as new supplies are about to arrive. The Canadian government said Tuesday that farmers will harvest 17 million metric tons this year, down 1.2 percent from 2015 but the third-biggest crop ever. Last year, China got about 90 percent of its canola from Canada, or about 3.9 million tons, government data show.
“If China’s gone, then we don’t need a monster canola crop,” said Ken Ball, a senior adviser at PI Financial in Winnipeg, Manitoba.
Canola futures that traded Wednesday at C$474 a ton in Winnipeg may slip by October to lows reached in July, when they slipped to C$442.20, according to RBC Dominion Securities. Futures have averaged about C$483 this year. Prices fell 0.8 percent today, heading for the biggest drop in three weeks.
China plans to reduce the amount of foreign material allowed in each shipment to 1 percent from 2.5 percent, starting Sept. 1. Canadian exporters say they have been told by Chinese officials that the new restrictions are intended to limit the potential spread of blackleg, a fungus that causes significant yield loss. But the industry funded Canola Council of Canada says the risk is very low, because imports arrive in parts of China that don’t grow rapeseed.
The General Administration of Quality Supervision, Inspection and Quarantine, China’s quality watchdog, declined to comment when contacted on Tuesday.
China has options if supplies from Canada dry up, including using other crops or purchasing canola from Australia, which normally sells to Europe. Of the world’s four major oilseeds, soybeans account for more than two-thirds of total supply, and China is by far the biggest buyer.
While China has ramped up imports over the past decade as domestic output failed to keep pace with rising demand, stockpiles have grown and could be used to replace some of the lost imports from Canada. Last year, inventories of canola oil surged to a record 4.16 million tons, and bins held 17 million tons of soybeans, an all-time high, U.S. Department of Agriculture data show.
“The import tightening is to help sales of state edible oils and oilseed reserves,” said Lu Yun, an analyst with Shanghai JC Intelligence Co. Over the past two years, feed mills have been reducing the amount of canola meal used to feed livestock and fish, he said.
Even before the rule change began, sales to China have been slowing, with few exporters booking shipments past September because it would be so difficult to meet the new import standards, said Patti Miller, president of Winnipeg-based Canola Council.
This isn’t the first time concerns over blackleg fungus have disrupted exports. After an emergency quarantine order by China in 2009, Canadian exports tumbled to 900,000 tons in the 2010-2011 crop year from 2.2 million a year earlier, said Brian Innes, vice-president of government relations for the Canola Council.
This time around, exporters probably will look to sell as much canola as possible to other buyers, including in Europe, rather than risk China rejecting a shipment, said Ball at PI Financial. Japan was the No. 2 buyer of canola last year, while the U.S. was the top importer of Canadian canola oil and meal.
But even if more canola ends up in non-traditional markets like Europe, the Middle East, Bangladesh and Pakistan, farmers in Canada may get stuck with unwanted supplies, said Tony Tryhuk, branch manager of RBC Dominion Securities’ office in Winnipeg. The government is probably underestimating this year’s crop yields, and production may reach an all-time high of 19 million tons, he said. If that happens, stockpiles before next year’s harvest may reach 3 million tons, the second-most ever for that time period, he said.
“We don’t know how far away we are from a solution,” Tryhuk said. “It’s a bit of a waiting game.”