Canada Markets

It has taken time for me to respond to last week's announcement from China that they were imposing a 75.8% anti-dumping duty on Canadian canola imports, essentially blocking trade between the two countries. That's because my message could be taken as condoning the action. Much to the contrary, there is no place in healthy trade for politically motivated actions. To be clear, this is more a producer stress management post as much as anything and in no way a political statement. Sometimes facts help.

Beginning at the end, likely the best thing a producer could do at this point is to focus on harvest, expecting to store any unpriced canola for now, and wait to see how long it takes the market to get past the surprise. In the spring, it took four weeks to recover completely from the $85/metric ton (mt) initial price break on the surprising announcement of 100% tariffs on Canadian canola oil and meal imports into China, and just five weeks to set new highs for the year. Will that happen again? Too soon to tell; but given the break was only $35/mt this time and the factors about to be laid out suggest the possibility, there appears to be no reason to panic while waiting to see.

To begin with, while there never is a good time for trade disruptions -- there really couldn't be a better time than this year given the inadequate supply situation Canada has found itself in. As a reminder, the initial tariff shock and concerns over the anti-dumping investigation right ahead of seeding was responsible for lost canola acres this spring. That set the stage for inadequate production, especially considering demand has been stellar all summer, including from China.

In fact, both Agriculture and Agri-Food Canada (AAFC) and USDA expect exports will have to fall significantly compared to 2024-25 levels due to a lack of available supply. It was just unclear how that would ever happen -- until now anyway. AAFC is more pessimistic about production, pegging it at 17.8 million metric tons (mmt), and assuming exports will have to fall from 9.5 mmt in 2024-25 to 6 mmt in 2025-26 as a result. USDA is more optimistic on the crop potential, estimating it at 19.25 mmt while suggesting exports will only have to fall to 7.6 mmt in 2025-26. Part of the reason USDA didn't lower exports as much (besides realizing how hard it would be to cut 3.5 mmt from export demand) is because they are assuming 400,000 mt less in domestic use compared to AAFC for 2025-26.

In short, if China took 2 mmt to 3 mmt less canola seed compared to the recent roughly 5-mmt annual average, it would help answer the question as to how to achieve lower exports when the world's canola stocks are tight. It's worth noting that even throughout the China import restrictions over blackleg concerns from March 2019 to May 2022, they imported 1.545 mmt in 2019; 2.576 mmt in 2020; 2.252 mmt in 2021; and 2.169 mmt in 2022. So, considering their alternative sources are limited, the duties are being held until a final ruling is made, and there is political pressure from Western Canada to resolve the issue, a 2-mmt to 3-mmt reduction in exports to China may still be hard to achieve.

Headlines over China's attempts to improve relations with Australia and re-establish canola trade may be overblown. To put it bluntly, Australia does not have enough canola to offset Canadian supplies. They are expected to produce about 4% less in 2025-26 than the previous year when they virtually ran out of exportable supplies by May, having to wait until November to resume (significant) shipments. Plus, with over half of the nearly 5 mmt available for export destined for Europe, a reallocation of trade would be the outcome of increased exports to China. Europe still would need canola so would look to Canada should they be shut out of Australia.

That brings us back to the headline. During the previous trade disruption, from March 2019 to May 2022 (more commonly thought of as a retaliation over the Huawei CFO detainment), the United Arab Emirates sharply increased their purchases of Canadian canola seed. It was widely believed to have been resold to China to avoid the trade restrictions. Looking at the accompanying chart of their imports (with that era in orange), it's hard to argue. It's worth noting the significant drop off in 2022. With China ending restrictions in May 2022, it's reasonable to assume that the UAE had sufficient warning to end the arbitrage strategy ahead of time. Looking at the current situation, their imports increased following the tariff announcement on Canadian canola oil and meal imports into China with speculation rampant that they are crushing the seed and selling the oil and meal to China. In a world full of tariffs and methods of getting around them, it would make perfect sense. In fact, the UAE was the third largest importer of canola seed in June, taking 129,000 mt of canola seed from Canada in that month alone. If history repeats, they may contribute to exports remaining higher than what supply allows for. Time will tell, and we'll be watching.

Interestingly enough, the greatest short-term price risk may have come from market participants themselves. The recent Commitments of Traders (COT) report shows managed money traders have been actively selling off their long positions on the news. They already had been a constant source of selling pressure since prices topped out in mid-June with that accelerating on the anti-dumping duty news. They sold 29,934 contracts or almost 600,000 mt during the week ended Aug. 12. That brought them down to just 54,732 contracts net long as of that cutoff with many of those likely sold by now.

It's worth noting their activity in March. They had hit 85,360 contracts net long prior to the canola oil and meal tariff surprise announcement. Aggressively sold for a month -- taking them to 68,425 contracts net short, then aggressively bought for two months -- taking them back up to 106,983 contracts net long. They continued buying, ending eventually at a record net-long position of 141,907 contracts or 2.84 mmt, while canola prices topped out almost $200/mt above the March low. Quite a violent swing that surely added to the volatile price moves at the time. If history repeats, and this analysis is correct, short-term selling by this group currently should not change the long-term outlook of tight supplies amid strong demand.

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Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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