Even as Beijing shuns Canada's canola, Canadian wheat sales to China soar

It's been a grim year for canola farmers in Canada, who appear to be collateral victims of a diplomatic brawl between Beijing and Ottawa over the arrest of Huawei executive Meng Wangzhou.

Wheat farmers, on the other hand, are enjoying soaring foreign sales. And they have the People's Republic of China to thank for them.

"Canada's share of total Chinese imports of wheat has rocketed above 60 per cent in 2018/19, up from 32 per cent in 2017/18," reports the latest edition of the U.S. Department of Agriculture's Canada Grain and Feed Bulletin.

The report, produced by an agricultural attaché at the U.S. Embassy in Ottawa, notes that Canadian farmers' gains have come at the expense of their American counterparts: "U.S. wheat exports to China have plunged and Australian exportable supplies have fallen sharply."

Many Canadian wheat growers also plant canola; for them, the spike in wheat sales to China is compensating in part for a slump in canola sales. It also leaves them with the challenge of deciding what to plant next year in a volatile global trading climate.

"(China) was close to half of our seed exports," said Jim Everson, president of the Canola Council of Canada. "We would say that now prices are down around 10 per cent to 12 per cent since this challenge started in March. Canola producers last year got $10 billion in cash receipts as direct payment for their marketing of canola.

"So a ten to 12 per cent drop. That's in excess of a billion dollars that's come out of the canola economy."

Cam Dahl, president of Cereals Canada, confirms that Canadian wheat farmers have reaped a benefit from the escalating trade war between Washington and Beijing.

"We've had very robust sales of wheat into China," he said. "We've also seen a good year for barley. With wheat we normally export in the region of 450,000 to 500,000 tonnes ... to China, and this year we'll be at approximately two million tonnes."

Although China produces more wheat than any other country in the world, Dahl said it typically has turned to three countries to supply it with certain varieties: Australia, Canada and the United States.

"Australia's going through a series of droughts and just doesn't have the supply available, and because of the trade issues with the U.S., China's not importing wheat from the U.S. either," he said. "That is the reason for the significant increase in (Canadian) exports to China."

Boom not enough to compensate

The increase in wheat sales could mean roughly an extra $500 million in the pockets of Canadian farmers. But Dahl said that won't compensate for the loss of income Canadian farmers have suffered because of China's decision not to buy their canola.

Everson said the depressed market for canola undercuts a staple crop on which Canadian farmers have come to rely.

"Farmers will tell you that canola has been the go-to crop in the sense that it's paying a lot of the bills," he said. "The input costs are high on canola, but on the other hand, the value they get on the sales of their canola is very good. That's been driving increases in acreage and production for many years."

While the Canola Council hopes farmers will choose to plant canola again next year, Everson said he wouldn't be surprised to see a decline in acreage as farmers try to hedge their bets and reduce upfront costs.

"In southern Alberta, where there's a lot of beef production and you have feedlots in the area, a farmer might make a decision to grow feed barley, for example, that can go to the local feedlot," he said. "They may determine that's a safer thing to do under the circumstances, to move some of their acreage that way."

And while wheat farmers have found a ready market for their grain, they're less than thrilled about the prices they are receiving.

Don Grandberg, who farms in southeast Saskatchewan, said he's seen prices decline by more than 20 per cent since last year.

"When I did my crop projections for 2019 I used a value of $7.00 for wheat in my spread sheet," he said. "After total expenses, I would need to grow a minimum of 46.4 bushels per acre to break even. With a price of $5.50 ( the price this morning is $5.41 Bu) I will now need a minimum of 59 bushels per acre, just to break even, not making a profit."

A yield of 59 bushels per acre is technically possible — but it depends on nature's assistance. The average spring wheat yield for Saskatchewan over the past five years has been 44.3 bushels per acre.

Soil, weather, politics

Officially, there is no connection between China's canola ban and its high-profile dispute with Canada over the arrest of Meng Wanzhou in Vancouver last December for extradition to the United States to face charges of conspiracy, fraud and obstruction.

But diplomats and political observers say the trade pressure China is putting on one of Canada's most important agricultural exports is clearly part of Beijing's strategy to goad Canada into letting Meng go.

Whether they grow canola or wheat, or both, Canadian farmers agree that their always-unpredictable business has become even more unstable as the world becomes more protectionist.

Farmers are usually thinking about next year as they harvest this year's crop. Most are arranging this fall to buy the seed they intend to plant next spring.

In normal times, the calculations that go into choosing one crop over another revolve around soil, weather and commodity prices. Farmers may rotate crops to avoid exhausting soil and spreading disease, for example, while commodity prices typically are driven by familiar rules of supply and demand.

But those calculations tend to be upended by trade wars like the one going on now between China and the U.S. "Trade and international politics is as important to a farmer today as the weather is," said Dahl.

And the trade politics affecting Canadian growers' outlook for next spring extends far beyond disputes involving China. Wheat is a case in point.

Barriers rise from Italy to India

Until recently, much of Italy's pasta was made with Saskatchewan durum wheat, and Italy was the biggest buyer of Canadian wheat in the world. Not anymore.

"They have introduced country-of-origin labelling that really is aimed at protectionism," said Dahl. "The result is that Italian pasta makers give priority to Italian and European durum, not to Canadian exports.

"That has resulted in about a 60 per cent drop in our exports to Italy and this comes after we've signed a trade agreement with the European Union (CETA). So we're seeing protectionist measures from Italy slash our exports after we signed a trade agreement with them."

Protectionist politics is closing off the Indian market to Canadian growers as well, Dahl said.

"We've gone in a very short period from a time when trading nations and our customers were looking at ways of facilitating trade and reducing barriers, and moving to an open market that very much benefited Canadian agriculture, to a new time of protectionism," he said. "We're seeing market access barriers rise and really threaten some of those major markets for Canadian crops."

High-stakes decisions

It all means that many Canadian farmers will have to make some risky calculations over the next month or two — knowing that a decision taken behind closed doors in Beijing, or an inflammatory tweet from the Oval Office, could throw their carefully-laid plans into chaos.

"It's a difficult issue for producers when they're making decisions about planting for next year," said Everson, "but it also has ripple effects throughout the economy, in terms of producers making decisions about new equipment they might buy, or processors who might be looking at upgrading their capacity and so on. They'll have to rethink some of those investments."

Dahl said some farmers will be tempted to limit their investment to reduce exposure to the vagaries of trade wars.

"They'll be looking at cost, maybe putting in crops that have a lower cost of production. It's a difficult time, because it's not just one issue, it's not just one country, it's not just one commodity. Farmers are facing some very difficult choices coming up."