Ask Our Analysts – China’s Canola Demand

Posted on July 15, 2020

I read somewhere that Chinese canola oil futures reached a multi-year high and that open interest was at its high point for the current year. Is this potentially positive for Canadian canola or canola oil exports to China? - FarmLink client outside Saskatoon, Saskatchewan.

The two most decisive factors in agriculture are weather and government policy. The commonality between the two is that an individual farmer has no control over either of them. Politics weighed heavily on canola over the last two years. China had been Canada's best canola customer before Huawei’s CFO’s detention. China is angry at Canada, and there are no signs it will abate. It will not be "business as usual" anytime soon.

Despite restricting Canadian market access, China continues to use canola. Canola oil is a premium vegoil that garners a higher price from consumers than other bulk vegoils. Canola meal remains an in-demand protein. There is a preference for canola meal in aquaculture. The bottom line is that Chinese food processing, aquaculture, and consumers identify canola as a positive and desirable product.

Argument: The coronavirus disrupted vegoil demand in the first part of 2020. However, China emerged from the worst of quarantine-induced slowdowns. Activity is gradually returning to normal. Unfortunately, many regions face serious flooding that has disrupted aquaculture and hurt demand for canola meal. Remember, crushing oilseeds depends on placing both components to maintain profitability. Crushers slowed down due to a lack of feasible meal demand which has led to a shortage of canola oil. This helps explain the recent price movement. Once things "normalize", prices will scale back and politics will dictate import flow.

Counterargument: Canola oil prices have been on the move for several months. The slowdown in aquaculture demand for canola meal is a more recent phenomenon. There is legitimate demand, and this demand pushes prices higher due to a tighter stockpile of available canola. This then opens the door for arbitrage opportunities. Canadian canola or canola oil could see heightened demand. There has been an uptick in demand for Canadian canola - from January through May 2020 exports have averaged 220 KMT/month versus 175 KMT for the same period in 2019. The demand is real, and efforts will be made to get more canola into China. Necessarily, this canola originates in Canada.

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