Flax markets fluctuate

In November 2017, Russia and China signed a phyotsanitary protocol that tabled terms allowing a number of commodities access into China. One of them included flax, a stepping stone for greater and faster flax entry into China.

Stoked by profitability

Some will claim that 2009 Triffid incident permanently changed global flax trade, but we also can't ignore how profitability stoked former Soviet Union production to where it is today. Whenever there is a profit growing something in Canada, all the FSU needs is time to learn and adopt practices. Quality can often be inferior to Canada's, but lower price always compensates. 

Research indicates an estimate of over 100,000 tonnes of Russian flax traded into China this crop year. It would appear most of the Russian flax is railed and used within inner Mongolia of China.

If Canada had to sell flax to Europe today, basis a US $445 per tonne FSU landed Europe price indication, Saskatchewan elevator prices would be about $10 per bushel. 

Cheaper Former Soviet Union price offerings have largely been responsible for minimal European buys of Canada flax in the past five years.

Since cash prices have hovered at $11.50 to $12 per bushel most of year, odds of being able to sustain such price divergence over the long term seem low. The world will figure it out with time, and this evolving Russian and China relationship is incremental proof.  Cheaper FSU price offerings have largely been responsible for minimal European buys of Canada flax in the past five years.

China as a residual buyer

China is poised to become the residual buyer for FSU linseed formerly bound for Turkey via toll-crushing. That came to a halt this year when Turkey hit imported flax with new tariffs.

The risk to Canada is competitive encroachment. The flax trade has many participants, meaning most transactions are non-transparent. Long-standing relationships and favourable logistics will still leave Canada with a core flax supply-servicing role to China, however, it would be wrong to ignore the probable arbitrage incentives and awareness that cheaper FSU origin supply introduces into China.  

Changing face of the flax market

Flax price discovery use to largely be about two independent relationships: FSU and Europe; North America and China. Now, the flax market seems poised to evolve and greater intricacies between all players will be created. For example, if China imports larger tonnage from FSU, then Canada and European Union trade math should evolve by either FSU-origin price rising, or Canada-origin falling more often. In other words, price spreads tighten.

More FSU ag exports

Deeper FSU agriculture exports are an evolving trend and flax is another example of this. More flax supply choice means more competition, which should dilute the frothiness and exclusivity that Canada once had with China. As a result, Canadian price arbitrages differently, but to a lower average most times. This won’t happen overnight, but it feels like the Russian and Chinese relationship is maturing favourably, so the global landscape of flax (trade flows and price discovery) is likely to change in coming one to two years.

Bottom line

An increasing number of former Soviet Union countries are producing flax, resulting in a more robust trade market and impacting Canada's strength in flax trade with China. Long-standing relationships and favourable logistics mean Canada is still in a good position, but the exporters should be mindful of the growing FSU markets.

Greg Kostal of Kostal Ag Consulting Ltd provides insight on commodity markets and marketing guidance. For more information, please visit www.gregkostal.com