Canada Markets

Will Sask. Producers Agree to Disagree on Canola Component Pricing?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Western Canada's canola oil content has trended higher over time, while the debate continues whether producers should benefit with premiums paid based on the crop's components. (DTN photo by Elaine Shein)

The Saskatchewan Canola Development Commission held a webinar on Wednesday titled Component Pricing in Canola: Weighing the Options. This is a follow-up to a study conducted by the organization to study the age-old debate over whether Saskatchewan canola producers are receiving full value for their production based on oil content.

Producers have pushed this issue forward over time, driven by a long-term trend which has saw oil content levels move higher. The 2015 mean oil content for Western Canada was reported at 44.2%, while between 2010 through 2014, a range of 4.6% to 19.5% of the Western Canada crop tested above 47% oil content.

The concept is not new, having been utilized in both Australia and the United Kingdom since the 1980s, with the use of premium and discount schedules used to drive market behaviors over time, such as the selection of high oil content varieties or the implementation of agronomic practices.

For a number of reasons, the study failed to find reason for Saskatchewan producers to advocate for a component pricing system. Some of the reasons given include:

-- Canola is viewed primarily as a bulk commodity with few buyers, leaving Canada's industry as a price taker. Approximately 95% of Canada's exports are reported to go to just five countries. Prices are determined by the supply and demand situations of competing vegetable oils, where a high degree of substitutability exists.

-- It is viewed as "unlikely" that domestic and global buyers would consider paying a premium for higher quality product. The move would be accompanied by higher costs associated with activities such as administration and segregation of seed, while players in the industry are more concerned with efficiencies and return on assets.

-- The incremental freight costs of moving product to sales which pay premiums based on higher oil contents can quickly erode any premiums received.

-- Producers can have little influence over oil content based on agronomic practices, with environmental conditions playing a larger role.

-- Without premiums received by buyers, any move in the country to initiate a component-based pricing system would be viewed as a zero-sum game, meaning lower oil-content product would be theoretically discounted enough to meet the premiums paid on higher quality product, with no net-benefit brought to the industry.

Will the results of this study please those who pushed for it and end this debate once and for all? I say unlikely. One line of questioning by a webinar participant centered on the extra costs faced in purchasing seed with higher oil-content properties, the incremental on-farm storage costs and the increased risks associated with storing the crop. Meanwhile, there's no ability to recoup these costs when delivering a high-quality product that should be viewed as desirable by crushers or exporters.

While it makes sense that the entire debate revolves around the ability to extract premiums from buyers, the suggestion that this would be "unlikely" in the report's conclusions as shown above perhaps leaves the door open. It may seem hard to accept that Canada's traders are not extracting full value for exports of premium product, just as the industry has been successful in segregating and marketing so many other commodities.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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