Report Shows Canadian Canola Industry in Stronger Position to Handle China Ban due to Diversification

September 6, 2024 TruthUSA

A potential Chinese ban on Canadian canola could cost billions, but thanks to market diversification, the industry is now better equipped to handle such a setback compared to when a similar measure was imposed in 2019, a report says.

China announced an anti-dumping investigation into Canadian canola imports this week, shortly after Ottawa imposed a 100 percent tariff on Chinese electric vehicles. This move aligns with measures from the United States and European Union to address what the countries describe as unfair Chinese trade practices.

This is the second time Beijing has targeted Canadian canola during a dispute. China suspended export licenses in March of 2019 for two of Canada’s largest grain handlers, Viterra and Richardson International, citing alleged pest contamination. The restriction followed Canada’s arrest of Huawei executive Meng Wanzhou and was only lifted in May 2022 after her release.

The 2019 ban cost Canada between $1.54 billion and $2.35 billion from lost sales and lower prices between March 2019 and August 2020, according to the Canola Council of Canada. It noted that, in the five years before the restrictions, China accounted for an average of about 40 percent of Canadian canola seed exports, but this dropped to roughly 20 percent after the ban took effect.

A Sept. 5 report from Morningstar DBRS said China’s latest canola investigation might lead it to impose tariffs on the crop, which could “be equally as costly for Canada,” potentially costing billions.

“That said, we believe the Canadian grain handling industry is much better positioned to navigate a potential trading action than in 2019, considering its more diversified and better established customer relationships as well as gradually increasing domestic processing capacity,” the report said.

“Furthermore, even in the event of meaningful tariffs, we anticipate global trade flows to ultimately rebalance as volumes shift to and from other geographies to satisfy global demand.”

‘No Long-Term Credit Impact’

While a potential Chinese tariff could have “a meaningful impact on global canola trade flows,” Morningstar DBRS said that global trade flow will eventually rebalance as volumes shift to other markets, similar to what occurred after the 2019 restrictions. This is evident in the fact that Canada’s total canola exports remained stable after China’s 2019 ban, the credit rating agency said.

Canola originally destined for China following the 2019 ban was redirected to Europe, Japan, and Mexico, the next largest importers, data from the Canola Council of Canada shows. Europe absorbed the majority of the canola seeds export, receiving 1.3 million tonnes in 2019 and 2.5 million tonnes in 2020, compared to an average of 0.4 million tonnes in the five years prior to the China ban.

Similarly, canola seed exports to Japan and Mexico increased slightly to a combined 3.6 million tonnes in 2020, up from 3.1 million tonnes in 2018.

Morningstar DBRS highlighted other factors that could help Canadian grain handlers manage a potential Chinese tariff. Canola oil and meal seem to be excluded from the probe, as they were in 2019, which could help offset the impact if a tariff is imposed on canola seeds. Additionally, strong North American demand for canola oil in the renewable fuels market could mitigate the need for increased exports to China.

“Acknowledging short-term volatility and some negative earnings pressures, we anticipate a canola-related trading action will not have a material adverse effect on the long-term credit risk profiles of most Canadian grain handlers,” the credit rating agency said.

‘Calls for ‘Rule-Based’ Trade’

Canola is primarily grown in the western provinces of Alberta, Saskatchewan, and Manitoba, with about 40,000 Canadian farmers producing about 20 million tonnes annually, according to the Canola Council of Canada.

Canola Council President and CEO Chris Davison expressed concerns about the Chinese investigation in a Sept. 3 statement, noting that Canada’s canola trade is grounded in rule-based practices. He stated that the group’s top priority is to “maintain open and predictable trade for canola.”

The Canadian Canola Growers Association (CCGA), a national organization for canola farmers, noted that China’s announcement comes during peak harvest season and called for rule-based trade practices.

“Canadian farmers rely on rules-based international trade, and we feel strongly that Canada’s canola trade is in alignment with that,” CCGA President and CEO Rick White said in a press release.

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