Volatile prices can be a positive driver of oilseed exports
We continue to explore patterns in agricultural and food trade drawing from the insights of our recently released report Navigating Trade Disruptions and Volatility. Last week’s post focused on the global performance and diversity of Canadian exports. Today’s post focuses on the relationship between price volatility and export performance.
China-U.S. trade disruptions in 2018 diverted global trade flows of soybeans, pork, and other commodities, affecting their prices too, for all global traders. As Canadian export prices have jumped (up and down), Canadian exporters and their buyers changed the way they bought and sold products. This matters to Canadian exporters. We found that volatility in the export price of soybeans and canola can suppress exports, while in other instances lead to a surge of sales across markets.
Businesses are usually averse to volatility. Buyers hesitate when they’re uncertain of future price movements, postponing purchases in hopes prices will retreat (because in periods of great volatility, they rise and decline quickly). Or, they can be motivated to buy more when prices start to jump around, in efforts to hedge against the pain of future price increases they see as likely.
At the same time, exporters may be able to take advantage of prices that may rarely be higher again in the near term, selling more than they would normally into select markets. Or, like buyers, they may postpone their trading, waiting for a month when prices improve, or at least, stabilize.
Canada’s overall canola exports decline in months when volatility in canola prices increases. To understand how, let’s assume that volatility in the export price of canola doubles over a 12-month horizon. This is large shift that rarely occurs. But it is useful to understand how volatility works. In this case, the response of Canadian canola exports would be uniform among key markets, with losses in exports ranging between 7.9% (Mexico) and 11.8% (the U.S.).
Canadian soy exports behave differently when faced with high price volatility. Japan and the U.S. are likely to see a drop of about 6.5% in Canadian soybeans, while China would gain 3.7%. Spain, however, would buy 18.3% more under the same conditions. Given Spain and China accounted for 46% of Canada’s overall soy exports in 2017, their combined growth in imports during months of more volatile prices are enough to keep Canada’s overall volume of soybean exports from falling. Volatility in this case re-allocates sales across our export markets.
As the reference price of ag commodities changes in response to major supply/demand shocks like the 2018 tariffs, Canadian prices shift. When the price of a commodity jumps, buyers change their behaviour and, typically, buy less from Canadian exporters. The opposite is also true. Bottom line is that volatility matters for Canadian export performance – for better or worse.
Vice-President and Chief Economist
Jean-Philippe (J.P.) Gervais is the Vice-President and Chief Economist at FCC. His insights help guide strategy and monitor risk throughout the corporation. In addition to acting as an FCC spokesperson on economic matters, J.P. provides commentary on the agri-food industry through videos and the FCC Economics blog.
Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He’s also a past president of the Canadian Agricultural Economics Society (CAES). J.P. earned his Ph.D. in economics from Iowa State University in 1999.