Canola Oil Market Shortage
Canada is known to be the biggest canola grower in the world. However, recent events have caused the country to run short of these commercial oilseeds approximately six months prior to the next harvest. The strong export demand has also driven the prices to nearly 13-year highs in January this year.
Why is Canola Important?
Canola is known for its bright yellow flowers. These flowers are crushed to extract canola oil—one of the most common oils used in cooking around the world. It’s mainly used for making French fries, salad dressings, and mayonnaise, but is also generally found in households for daily use. Canola plants are also used to make meals in order to feeds livestock such as pigs. Therefore, canola is one of the most important crops that is grown currently.
According to the latest independent analysis commissioned Canola Council of Canada, in the last 10 years, canola’s contribution to the economy of Canada has increased by 35%, or $7.2 billion. This study also showed that the canola grown in Canada contributes around $29.9 billion to the Canadian economy each year. This includes $12 billion in wages and 207,000 Canadian jobs.
It is not difficult to comprehend that canola makes up a huge part of Canada’s economy and its trade with the rest of the world. And when the volumes of canola produced and its prices are higher, the economic benefits are also higher. Around 2016 and 2017, the impact of canola on Canadian economy peaked in both volumes and prices. Although the produce has eased slightly, its economic impact has remained substantial at historically high levels.
Why is There a Canola Shortage in the Market?
Ever since the outbreak of COVID-19, buyers are trying to hoard as much food supplies as possible – especially the non-perishable ones. This has resulted in the supplies of major commodity crops to dwindle worldwide.
Naturally, the increase in demand lead to an increase in prices as well. So when Manitoban farmer, Bill Craddock, had the chance to sell all of his canola crops at high prices in the autumn of last year, he believed it was a great decision to take that opportunity. However, as things progressed further and the demand increased even more, he noticed the prices hiked even more in the following months.
“I’m entering my 51st year of trading and the market is as volatile as I ever remember,” Craddock explained. “To try and make money from it, you have to stand your ground, and be right, or get killed.” Yet, Craddock was still able to make some profit by trading a small number of contracts for the future.
You can trace Canada’s canola shortage to this period. Last year’s autumn resulted in the smallest harvest the farmers had reaped in the past five years. With the hike in prices and demand, most of the farmers ended up selling their crops much earlier than usual in order to make as much profit as it seemed possible at the time.
According to the data released by the government, these early deliveries to commercial handlers helped Canada export almost 33% more canola year-to-date over the last year. On the contrary, this is also what lead to the ultimate shortage of the crop much earlier than expected.
The Effect of China’s Buying Spree
China has been the top buyer of canola for a while now. Yet, in the wake of the events of last year, China more than doubled the purchase, importing 1.2 million tonnes as of December 2020. Despite having a continued restriction against Canadian exporters Viterra and Richardson International, other exporters could still ship canola to the country. As its hog herd recovered from a deadly disease, African swine fever (ASF), the canola import help meet China’s insatiable demand for animal feed.
As the market continued to soar, a purchase price was locked in by the canola importers under the sales agreements in early January. According to Tony Tryhuk, Manager of Commodity Trading at RBC, this was a result of a fear that the lack of supply would cause the prices to hike even more. This caused Canadian exported on the other ends of the sales to be forced to buy futures of canola at high prices to fill them. However, Tryhuk added that this likely registered big losses in the process.
“We’re on the path to run out of canola going into spring,” explained Ken Ball, Senior Commodity Futures Advisor for PI Financial Corp. in Winnipeg, Manitoba. “The market’s also trying to encourage farmers not to hang onto their canola and sell it now.”
2021 and Forward
As of 2021-2022, China’s demand for animal feed is expected to continue, as its pig industry rebuilds following the ASF outbreak. Therefore, it is predicted that this feed demand will remain the main driver within the oilseeds complex for the short term.
During the next two years, the world canola price is expected to average around US$491 per tonne. This would be 19% more than the 5-year average of US$415 up to 2020-2021. Surprisingly, the export price of Australian canola has remained more or less consistent since the previous year, and things are expected to continue similarly into 2021-2022.
It is expected that the global economic recovery and increasing incomes over the medium term to 2025-2026 will reinforce strengthening demands for oilseeds, especially in the Asian region. Similarly, as the world economies recover from the impact left by coronavirus-related restrictions, a growth in the demand of biodiesel oil is also expected.
Canada to Remain Strong in the Business
Despite the current shortage of canola oil in Canada, it is predicted that the Canadian canola production will rebound in 2021-2022. Not only that, but it is also expected to increase by 5%, which is almost 20 million tonnes. However, due to the persistent dryness in majority of the growing regions, the canola supply in the European Union is believed to remain low.
Since the world demand for canola is expected to surpass the supply significantly in the short term, this will lead to a reduction in stocks and supporting prices in 2021-2022. However, as the supply responds to the higher prices over the medium term to 2025-2026, the world stocks are expected to increase.
Despite the coronavirus related restrictions, there hasn’t been an adverse effect on the world’s consumption of vegetable oil. This clearly means that vegetable oils are a staple and their demand is relatively unresponsive to the changes its consumers’ incomes. Therefore, vegetable oil demand is predicted to continue rising with urbanization and population growth.
By 2020-2021, the world food demand for vegetable oil is expected to increase by 35, which is about 155 million tonnes. It is further expected to rise gradually over the medium term as well. The main factor behind this increase is the rising demand in Asian markets.
All of this provides Canadian suppliers with ample opportunity to work hard on their crops and make profits in the coming years.
Australia to Increase its Supply
It is estimated that the Australian canola production will increase by 74% to 4.1 million tonnes by 2021-2022 – 23% more than the 10-year average up to 2019-2020. This increase would be a result of improved seasonal conditions, especially across the eastern cropping regions and a harvest in Western Australia that is better than expected.
The domestic price of Australian canola is expected to reach equivalence with the export price in 2020-2021, following the 3 consecutive years of production that were affected by the draught. Since the international prices are expected to remain high, the domestic export value and domestic production of Australian canola is expected to increase significantly. This suggests that in the marketing year of 2020-2021, the Australian canola exports are expected to strongly recover, increasing to 2.9 million tonnes or 91%.
It also forecasted that the amount of land dedicated to plant canola crops in Australia is also likely to increase in 2021-2022. This would be a reflection of the moisture stored in the soil due to the above average rainfall in summer. Over the medium term of 2025-2026, canola plantation is expected to take up 10 to 15% of the area dedicated to winter crops – ranging from 2.4 to 2.5 million hectares. However, certain changes may occur year to year, depending on the grower constraints related to crop rotation, rainfall at the time of plantation, the growing conditions of the crops, and other factors.
If the following years provide favorable conditions of canola production in Australia, the country will likely enjoy a good export in the coming years.
However, unfavorable conditions in the short and long term – that is 2021-2022 to 2025-2026 – will lead to lower canola production in Australia and, therefore, lower exports.
However, lower production in the short term may not have a significant effect on the domestic price, since the stock-to-use ratio of the oilseeds complex across the world is expected to fall for another year. But if the conditions remain unfavorable in the long term, then it may affect the domestic price and export of Australian canola.
Long Term Predictions
Despite the COVID-19 related restriction, it has been estimated that the global market for canola is at 32.5 million tonnes in 2020. By 2027, this is projected to reach a revised number of 44.8 million tonnes – growing at a CAGR of 4.7%. One of the segments analyzed in the report was cooking, which is expected to increase at a Compound Annual Growth Rate (CAGR) of 5.5% and will reach to 12.6 million tonnes by 2027.
China, who remain the world’s second largest economy, is expected to touch an estimated market size of 9.2 million tonnes.
In the year 2020, the market for canola oil in the U.S was estimated at 8.8 million tonnes. In the global market, the U.S. accounts for a 27.1% share. While only time will tell how things work out in the near future, the current situation of canola production isn’t the most ideal.
Lawrence Klusa, President of Winnipeg-based advisory firm Markets explains, “Countries are buying up crops, they don’t want shortages.” He further added, “We won’t run out because the price will go higher. Exports will slow down. With exports running over 33% above last year’s pace, strong crush and a smaller crop, traders will be asking what’s actually left out there to sell.”
We haven’t run out of canola supplies yet. However, the prices of this everyday household oil may increase in the near future and take a few years to come back to normal.