China helps augment canola demand growth

Market Focus

Highlights

  • China is a vegoil consuming machine, yet it is difficult to pinpoint specific trends
  • Chinese canola oil consumption exceeded supply by about one million tonnes in each of the last two years
  • While China can buy and consume four to five million tonnes of canola a year, that doesn’t mean they will be a buyer all the time

China is a vegoil consuming machine, yet it is difficult to pinpoint specific trends beyond traditional income, population and dietary change - ones like policy, desire to crush versus import or substitution amongst oils. Chinese data isn’t perfect, but United States Department of Agriculture is likely as good as anyplace with estimates.

Supply versus domestic use

The most important China canola chart is this canola oil supply versus domestic use. It shows canola oil consumption exceeding supply by about one million tonnes in each of the past two years. The core reason behind this is government decision to auction off government-owned inventory that it has accumulated in the past decade.

China demand is deep as long as crush margins are decent.

Absolutes are loose, but call it about 2.5 million tonnes a year for the past two years, supply that the trade has locked up for the balance of 2017. 

Reports suggest that about another one million tonnes is left for auction in 2018 and beyond. At that point, China will need to bump up canola oil supply either via production or imports.

Substitution

Greater vegoil substitution is another choice but is unlikely due to core domestic canola oil demand traits. Higher import potential was probable motivation for recent reports where two to three new Chinese crush plants were announced as being switched into canola. It’s a reason why the Canada to China canola seed export benchmark of four tonnes is apt to rise to five tonnes or more soon.

There’s more room for Canadian canola oil export growth too, but suspect respective supply stays in North America if U.S. biodiesel policy shifts to favour U.S. producers. 

Demand is deep

China demand is deep as long as crush margins are decent. While China can buy and consume four to five million tonnes of canola a year, that doesn’t mean they will price that amount and be a buyer all the time. When import math makes sense, they swing a big bat. Right now, China domestic crush margins likely would need to improve by about $30 to $50 a tonne to achieve that goal.

Despite a constructive demand backstop, the market is currently predisposed on North American supply what-ifs. How much canola area was planted or abandoned? Will it rain? What will the conclusion to the growing season bring? How will the U.S. soybean crop turn out?

Short-term/mid-term outlook

It’s easy to find demand outlets for canola, and China is just another part of the longer term constructive strong canola demand term story. 

Europe is also poised to remain a solid canola importer as 2017 crop size likely ends up around 21 to 21.5 million tonnes, versus a hoped for 23 million tonnes amount. 2017-2018 is not going to be a canola surplus year, which should perpetuate a medium to longer term sideways trend. That said, canola is already a richly priced oilseed consuming choice.

In the short term, main price focus ought to be on production what-ifs, but the medium term outlook is one

where canola is best described as big supply versus big demand. Each can have a downward and upward momentum leadership window that lasts about two months.

Keep in mind that while U.S. biodiesel policy news can flare up at anytime, the outcome is largely about shifting global vegoil and seed trade flows. Any extra North American vegoil consumption would come at the expense of offshore exports.

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

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