Where does Canada stand with China?

OTTAWA Canadian farmers are facing an uncertain global economic climate.

Even as China — this country’s No. 2 export market — tightens rules on shipments of canola over contamination concerns, commodity prices are dipping at home, which will cut into the profits of both Canadian growers and equipment makers.

But even before there were concerns over a canola crunch, North America’s agricultural sector was already exhibiting signs of growing pains. Agricultural costs had been going up over the past 10 years, pushed higher by land prices and construction activity, as well as equipment upgrades.

“The commodity prices have come down, but costs don’t. Corn and wheat prices are quite low, soybean prices are a little bit better and canola had prices had been better, but have (recently) been coming down,” said Ken Ball, a senior adviser at PI Financial, an investment group based in Winnipeg.

“Prices have declined back down to the level where farmers are going to break even on their crops — they just don’t have a lot of cash around for equipment purchases and all that.”

Just last week Deere & Co. — the world’s biggest farm-equipment marker — warned it will need to limit production in coming months as lower commodity prices cause farmers to shy away from buying new machinery.

The Moline, Ill.-based company reported on Aug. 19 an 11-per-cent drop in third-quarter retail sales in the U.S. and Canada — including Deere’s iconic green tractors and combines. Equipment sales are also falling in Europe and South America, the industry leader said.

The expected pullback in the Chinese market — prompted by new standards for canola imports, which take effect Sept. 1 — is further clouding the outlook for the industry, and for relations between Beijing and Ottawa.

“This matter is a priority for government officials, and we will continue to work with China and the Canadian canola industry to resolve this matter,” said Alex Lawrence, a spokesman for International Trade Minister Chrystia Freeland.

“Canola is a key aspect of Canada’s bilateral trade relationship with China. We are focused on a long-term solution, based on science, for our Canadian producers.”

Agriculture Minister Lawrence MacAulay “has also raised this with his counterparts in China and on more than one occasion with the Chinese ambassador to Canada,” Lawrence added.

Beijing says canola shipments from Canada contain unacceptable levels of a fungus called “blackleg.” It wants Canada to limit the amount of unnecessary material that could contain the fungal disease in canola shipments to less than one per cent “dockage rate.” The current limit is 2.5 per cent.

“Farming is a very capital intensive and cash intensive business. Margins are fairy thin, even in good times, and that’s because we are competing with other farmers around the world,” said Rick White, CEO of the Canadian Canola Growers Association. “But then an issue like this comes up with China, which will impose additional costs if we were to achieve this less-than-one per cent requirement that our competitors in the world would not face, and that puts us at a competitive disadvantage longer term. And that is just not acceptable.”

Exports of Canadian canola to China have soared in recent years, amounting to nearly half of all purchases originating from the Asian nation and totalling $2 billion in sales in 2015. As a result, China now has a hefty stockpile of canola and can afford to cut import levels by restricting shipments.

“China likes to have the ability to throw up barriers when it suits them and it’s to their advantage. So they’ll try to block shipments when it’s it to their advantage to do so,” said Ball, at PI Financial. “If they bring in this low dockage rate, it’s just a tool that they use and pull out of their pocket when they need it and, ‘oh, we’re rejecting this shipment on the dockage rates.’ ”

For the most part, the seeds of canola are crushed and used as cooking oil. The rest of the plant becomes animal feed. But, production of canola oil is likely to ease this year by 1.2 per cent, to 17 million tonnes.

“Extremely dry and wet weather conditions in different parts of the country have played a significant role in the production expectations reported in the July survey,” Statistics Canada said this week.

The crop estimate from Canada’s data agency “was a bit lower than expected, (but) it’s still a healthy size crop of 17 million tonnes. We expected it to be closer to 18 billion or even bigger,” Ball said.

“If we still had China fully in our market place, as they we did last season — as a very heavy buyer — 17 million tonnes of canola is not going to be nearly enough. We will run out of canola,” he said.

“But if China is absent to any degree because of this issue, then 17 million tonnes will be quite adequate. So, it’s a big issue. It’s the difference between a very aggressive bull market or a very aggressive bear market.”