Natural Resource Flash Report April 2019

Canada and China Clash Over Canola Trade

Natural Resource Flash Report April 2019

In March 2019, China rescinded the export licenses of the two largest Canadian canola companies, Richardson International and Viterra, to ship canola to China, citing non-compliance with plant health requirements. These two companies own four of the fourteen major canola crushing facilities in Canada.1 China also intensified its inspection measures and standards for canola seed imports from Canada, and intends to import far less product from Canada, according to Chinese Agriculture Ministry officials.2 Canola seed is a major component of Canadian agriculture and is grown on 43,000 farms, with a production value of about CAD9 billion annually, accounting for roughly 25% of Canada’s crop cash receipts.3 Canola oil is used as food for human consumption, and canola meal is used as animal feed. The vast majority of Canadian canola is grown in the western provinces of Alberta, Manitoba and Saskatchewan. China is the largest export destination for Canadian canola, accounting for 40% of Canada’s CAD11 billion in total canola product (including processed oil and meal) exports.4 Continuing trade in canola is important to both countries: Canada is the world’s largest canola producer and exporter, and China is the largest canola consumer and importer.5 In 2018, Canadian canola volumes to China comprised more than 20% of Canada’s canola production.6 In the absence of a resolution to this impasse, the disruption in canola trade will have a negative financial impact on Canadian canola farmers and processors. Global Canola Markets

Between 2007 and 2017, global canola seed trade grew at a 7.4% CAGR, and Chinese imports of canola grew at a 20% CAGR during the same period.7 Also in this same period, Mexico, East Asia (including China) and South Asia (India, Bangladesh and Pakistan) accounted for 67% of global canola imports.8 Key drivers of canola demand are the EU biodiesel sector and the edible oil market in which canola offers greater health benefits than vegetable oils that are higher in saturated and trans fats. Global canola production grew from 48 million metric tonnes (MT) in 2007 to 73 million in 2017, a 4.2% CAGR, and the major producing regions ranked by volume are the EU, Canada, China, India and Australia, which together account for about over 90% of global canola production.9 Growth in production has been driven by acreage expansion, especially in Canada, though also in the EU and the Black Sea region. And although China is the world’s third-largest canola grower, it does not produce sufficient quantities to support domestic demand.10 Canadian Canola Markets

In the ten-year period from 2007 to 2017, Canadian canola production increased from 10 million MT to 21 million MT, a CAGR of 8.4% (twice the global rate of increase), as canola-producing farmland increased from 16 million to 23 million acres, and yields improved at a 2% CAGR, from 0.7 MT/acre in 2007 to 0.9 MT/acre in 2017.11 Canada claims a primary role in the global canola market and is responsible for about 66% of world exports, with exports of canola accounting for an average of 57% of Canadian canola seed output over the past decade.12 Major export markets for Canadian canola are China, Japan, Mexico and the US – collectively representing about 86% of Canadian canola exports – with exports to China increasing by 3.3 million MT between 2007 and 2017 (CAGR 20%) and that country accounting for most of the export growth.13 China absorbed 29% of global canola imports in the 2017 marketing year, and given that Canada is the source of 66% of canola traded globally, a long-term shift away from Canada as the primary supplier of its imported canola would be a challenge for this Asian giant.14

1Canola Council of Canada, https://www.canolacouncil.org/markets-stats/industry-contacts/#Processors 2Bloomberg, https://www.bloomberg.com/news/articles/2019-04-17/canada-take-note-canola-shipments-to-china-will-keep-shrinking 3Canola Council of Canada, https://www.canolacouncil.org/markets-stats/industry-overview/ 4Canola Council of Canada, https://www.canolacouncil.org/markets-stats/industry-overview/ 5USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 6ITC Trademap, https://www.trademap.org/Index.aspx 7USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 8USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

9USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 10USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 11USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 12USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 13USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home 14USDA Production, Supply and Distribution, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Natural Resource Flash Report April 2019 2

Canada and China Clash Over Canola Trade (Continued from page 1)

Canada’s Growing Global Dominance in Canola Production and Exports Canada Canola Production and Exports (000 MT)

0%

5%

10%

15%

20%

25%

30%

0

5,000

10,000

15,000

20,000

25,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Production Exports Canada % of world canola production

Source: USDA Production, Supply and Distribution Database Online, as of April 10, 2019

Impact of China’s Canola Trade Restrictions

China’s canola import restrictions have triggered a decline in canola contracts traded on the futures market. May and July 2019 Intercontinental Exchange (ICE) canola futures contracts fell by more than 7% from the beginning of February to the beginning of April 2019.15 Despite the anticipated negative correction in canola prices, Canadian farmers may continue to plant canola this year since it is still relatively profitable compared to other crops such as wheat and pulses. Richardson International CEO Curt Vossen expects Canadian canola acreage to fall 5–15% in 2019,16 though this lower output is not likely to be sufficient to boost prices given the potential cutback in demand that the Chinese import restrictions represent. If these restrictions remain in place through 2019, it’s likely that canola inventories will accumulate and farmers’ margins will be compressed in the key canola-growing provinces of Alberta, Manitoba and Saskatchewan. The subsequent deterioration in farm income might then trigger an increase in the sale of farmland. Another potentially exacerbating factor would be an improvement in US-China trade relations, which could accelerate Chinese imports of US soybeans. Soybeans might offer a partial substitute for Canadian canola, particularly canola meal, though the healthier profile of canola oil should help prevent wholesale substitution. Yet another adverse factor is the swine fever in China, which continues to reduce the need for feed in its pork industry. Canadian canola growers might also face the loss of market share in China if trade licensing suspensions are prolonged. With the added pressure of fixed oilseed storage capacity and processing capability in Canada, if the trade issues are not resolved before the 2019 canola crop harvest, Canada will be forced to ship to other markets, primarily the EU. But adding Canadian exports to those from the Black Sea region would likely lead to oversupply in the EU. This, combined with the less efficient Western Canada overseas trade flows, would likely lead to reduced canola prices for Canadian farmers.

A broad Canadian political coalition is working on policy resolutions. Holding its first meeting on April 4, 2019, a government canola working group focused its attention on finding science-based solutions to the trade dispute with China. The group also explored new canola market opportunities and reviewed financial support available to affected producers. Co-chaired by the deputy minister of Agriculture and Agri-Food Canada and the president of the Canola Council of Canada, the group includes deputy ministers from the provinces of Alberta, Saskatchewan, and Manitoba as well as other government and industry leaders.17 Canada’s access to Pacific ports, the long-standing relationship with Chinese buyers, and the freight advantages of transporting to the US market should make Canada well-positioned to continue meeting the needs of the growing global canola market, despite the export restrictions to China. If China and Canada can resolve the trade dispute before the 2019 canola crop harvest, markets will likely return to price and volume conditions similar to those prior to the trade restrictions.

15ICE (Intercontinental Exchange), https://www.theice.com/products/251/Canola-Futures/data?marketId=5502805 16Bloomberg, https://www.bloomberg.com/news/articles/2019-04-03/chinese-quitting-canola-addiction-has-canadian-farmers-sweating 17Bloomberg, https://www.bloomberg.com/news/articles/2019-04-03/chinese-quitting-canola-addiction-has-canadian-farmers-sweating

Natural Resource Flash Report April 2019 3

HNRG Research Team

Court Washburn Managing Director and Chief Investment Officer cwashburn@hnrg.com Keith Balter Director of Economic Research kbalter@hnrg.com

Mary Ellen Aronow Associate Director, Forest Economics maronow@hnrg.com Daniel V. Serna Senior Agricultural Economist dserna@hnrg.com

Elizabeth Shestakova Economic Research Analyst eshestakova@hnrg.com Weiyi Zhang Natural Resource Economist wzhang@hnrg.com

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