Some good news from the last week: World demand for oilseeds will continue growing. Their newly released 2017-2026 Agricultural Outlook emphasizes “weak” growth throughout the outlook period. But, how weak is “weak?”
Crop markets have shown a remarkable strength that pushed Canadian farm revenues to record highs in 2016. Canadian producers remained profitable as new players entered the market, world stocks soared and prices declined. In this context, “weakening” growth loses some of its sting.
That said, a waning market warrants your attention. After having read the Outlook, I think three opportunities and challenges are of particular importance for Canada:
1. China’s insatiable appetite for oilseeds
China’s demand for oilseeds has been the single biggest driver of the global crop markets over the last decade. Chinese imports of soybeans climbed 314% between 2006 and 2016, a pace they’ll likely maintain.
Projections from the last ten years show that in 2007, the OECD-FAO expected China’s oilseeds imports to top 47.7 million metric tonnes (MMT) in 2017 (Figure 1). And even with evidence of the increasing rate of growth of Chinese consumption, the projections done in 2012 still grossly underestimated import levels in 2017 – by 20 million MMT.
2017’s forecast for the current year effectively doubles initial projections. Chinese imports are now forecast to be 93.6 MMT in 2017.
2. Biofuel production still trending up; share of corn used for ethanol declining
If China’s love of oilseeds was the story of the past decade, it replaced the story of biofuels as a key driver in the first decade of the new millennium. Corn-based ethanol production in the U.S. climbed from 6.2 million gallons in 2000 to 10.6 billion gallons in 2010. Corn-harvested acreage grew 12% which, combined with higher yields, increased corn production 26% - all of which went to ethanol production. But even this increase couldn’t meet the new demand; between 2000 and 2010, feed usage and corn exports also declined in efforts to grow ethanol production.
Going forward, expect ethanol-related demand for grains to stabilize. The OECD-FAO expects by 2020, U.S. growth in corn-based ethanol will still be positive, but much slower (less than 1% annually). Weaker demand for gasoline is expected to reverse that growth slightly between 2022 and 2027. In contrast, Brazil’s sugar-based ethanol production may jump more than 20% over this period.
3. Canadian leadership in wheat exports to be tested
Canadian wheat exports are expected to grow 6% by 2026 compared to the 2015-2017 average. Based on a projected 7% growth in wheat production to 2026, our export growth will fall behind that of the EU, the U.S., Russia and, most notably, Ukraine.
Ukraine’s exports are expected to increase 15% by 2026. That growth reflects, in part, a relative lack of Ukrainian capacity to process raw commodities. When domestic processing is unable to keep up to production, the excess must be exported. Unlike Canada, where some additional production will be absorbed into domestic processing, the expected 13% increase in Ukrainian production will mostly go to exports.
The sources of production increases will also differ. The 7% Canadian growth is based on the assumption of a 1.5% increase in acres, while Ukraine’s 13% growth is expected to require an additional 2.1% area devoted to wheat. These numbers suggest the OECD-FAO expects a big jump in Ukraine’s yields over the next ten years.
Productivity key to keep Canada’s long-term outlook positive
Currently a leading exporter of grains and oilseeds, Canada will maintain its elite ranking only with efforts to enhance productivity to meet growing demand amidst growing competition in export markets.