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Canola prices rising despite continued trade tensions with China

Canola prices could continue to rise even after the futures contract soared to its highest level in nearly two years amid continued trade tensions with China and back-door access to the Asian importer, experts say.

"As usual, (the upward movement) is a fairly complex situation," said Bruce Burnett, director of markets and weather at MarketsFarm, that provides analysis on commodity markets.

In March 2019, the Chinese government blocked canola seed imports from Richardson International Ltd. — one of Canada's largest grain producers — and Regina-based Viterra Inc. by suspending their licences. The decision followed the arrest of Chinese tech giant Huawei chief financial officer Meng Wanzhou in Vancouver a few months earlier.

More than a year later the situation hasn't really changed, said Brian Innes, vice-president of public affairs with the Canola Council of Canada, noting those two companies are still unable to export canola seeds to China.

That's led to reduced canola seed exports to China from Canada, he said, at roughly 30 per cent of normal levels.

In 2019, canola seed exports to China fell by about 70 per cent, the council says, resulting in about $1 billion in lost revenue from the commodity. Before the trade tensions, the Chinese market made up 40 per cent of Canada's canola seed, oil and meal exports, with canola seed exports totalling $2.7 billion in 2018, the council said.

China's moves against Canadian canola seed put the commodity's price in the basement, Innes said.

But, recently, the price has been trending up.

At the end of July, the canola futures contract on the Intercontinental Exchange hit $491.50 — a mark not seen since October 2018. By Monday, it had tapered off to $484.10 — still on the high end of the roughly $430 to $490 range it's been in since that 2018 high.

The sudden rise comes down to increasing demand from several sources, said Burnett.

Canada increased exports to Europe to make up some of the shortfall in Chinese purchases. European production dropped significantly over the past couple years, he said, increasing their need to import canola.

Additionally, Canada is exporting more to the United Arab Emirates where it has been reported they crush canola seed and send the oil to China via a so-called back-door route, Innes and Townsend said.

"Some third-party countries have also been crushing our canola and sending the oil to China," said Burnett.

Direct exports to China are also up, said Neil Townsend, chief market analyst at FarmLink Marketing Solutions.

"We've done pretty good going through the front door in China lately," he said, referring to exports as a whole.

Canada has averaged about 250 tonnes of canola exports over the past four months, he said, compared with roughly 125 tonnes in the same four months last year.

"That's quite good."

Additionally, there's growing demand from Canadian companies that purchase canola, crush it and sell the oil and meal to different markets, including domestically, he said.

The COVID-19 pandemic, which closed many restaurant dining rooms around the world, helped boost demand for canola oil by consumers who are cooking at home more, he said. In certain markets, such as Canada and China, consumers prefer to cook with canola oil at home, said Townsend.

Despite the increased demand and corresponding price bump, the commodity's price is still off of previous highs.

"These are good prices in Western Canada," said Townsend, "though, they're not extraordinary prices."

Without restricted access to the Chinese market and barring any significant loss from selling canola oil instead of seed to China, he said, the commodity price could crack $500 and move toward $515 or $520.

"But, we're not quite there yet."

This report by The Canadian Press was first published Aug. 11, 2020.

Aleksandra Sagan, The Canadian Press

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