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Canadian harvest debacle could force the wheat and rapeseed trade to be diverted

FORT COLLINS, (Colo.): A severe drought has brought expected US spring wheat production to a three-decade low, and crops across the border in the Canadian prairies are in similarly difficult shape. With little relief in sight, production forecasts should fall and other global export markets will likely have to catch up with the slack in Canada.

A significant portion of Canada’s annual wheat and rapeseed production is for export, and these products are important on the world stage. Top customer China is among those who need to look elsewhere for supplies and trade rival Australia could be a good candidate to fill that void.

Canada’s prairies have been in drought since the start of the growing season, and with low rainfall and warm temperatures, this situation has worsened over the past month. Wednesday’s forecasts continue to suggest that the warm-dry trend will continue at least until the end of the month.

In Saskatchewan, Canada’s best spring wheat and rapeseed province, spring wheat was rated good or excellent on July 12 with 25 percent, compared to 77 percent the previous month. Only 18 percent of the rapeseed was good or excellent, compared to 64 percent.

No. 2 producer Alberta has suffered a similar fate. Spring wheat was 39 percent good or excellent on July 13, up from 84 percent the previous month, and rapeseed had fallen from 80 percent to 33 percent. The two provinces together account for around 80 percent of Canada’s summer wheat and rapeseed production.

These health trends are similar to those for US spring wheat, but the US harvest started off worse. On Sunday, only 11 percent of US spring wheat was in good or excellent shape, up from 27 percent in the previous month and 45 percent at the end of May.

The futures markets have reacted when wheat hit an 8-1 / 2 year high for the front month contract of 9.44-1 / 2 a bushel in Minneapolis this week. ICE rapeseed hit an all-time high for the November contract of $ 949 per tonne last week.

The U.S. Department of Agriculture last week cut U.S. spring wheat yields 37 percent from the previous three-year average, which included strong but stable results. That put the harvest estimate at 345 million bushels, the smallest harvest since 1988, another terrible year of drought.

The US durum wheat harvest is expected to be 37.2 million bushels, around 46 percent less than last year and the smallest in 60 years.

However, the USDA’s Canadian whole wheat yield is too high for the current situation and is about 1 percent above the three-year average. About 94 percent of the wheat grown in Canada this year is spring or durum wheat, and the latter is in even worse shape. Canadian wheat yields were also among the worst ever in 1988, falling 37 percent below three years due to extreme drought and heat. If those losses were to materialize this year, Canada’s crops would fall 11.7 million tons (429 million bushels) from the USDA’s final 31.5 million, not counting a possible abandonment of acreage.

Canada planted much less canola in 1988 than it does today, but 2012 produced the worst relative yields in recent years during another hot and dry summer. Canola yield fell about 20 percent from the average this year, and if the same happened this year, it would remove at least 4 million tons from the USDA’s current 20.2 million.

EXPORT SWITCH

The loss in wheat and rapeseed production is significant for the export market, as around half of Canada’s rapeseed harvest and around three-quarters of its wheat are exported annually. The country accounts for two thirds of global rapeseed exports and is the third largest wheat exporter with around 13 percent of trade.

China’s demand for Canadian wheat was more than twice the three-year average in the first nine months of the current fiscal year. China was the largest recipient of the grain at 12 percent. Indonesia and Peru were also big players with 8 percent each.

China blocked Canola’s two largest canola traders two years ago over alleged pest concerns, but exports to China have still rebounded from last year. Between August and December 2020, 23 percent of Canada’s rapeseed deliveries went to China, only behind the European Union due to crop failures there. Japan is another prominent consumer of rapeseed.

China’s import demand for rapeseed and wheat is pale compared to, for example, soybeans, but is still among the top importers. Despite losses in Canada, China has an alternative route in Australia.

Trade relations between the two countries deteriorated last year when Canberra announced plans to investigate the origin of COVID-19, which led Beijing to impose high tariffs on Australian goods. The 80.5 percent tariff on barley was so severe that it practically cut the trade off, but China has increased imports of wheat and rapeseed from Australia.

Australia is the No. 2 exporter of canola and No. 5 in wheat, and the country’s production levels have recently recovered after a string of drought-damaged harvests. The additional Australian supply is crucial, especially in the Chinese market, but the expected losses from Canada could be historic.

Canada also has no surplus of rapeseed in reserves, as oilseed stocks declined 24 percent year-on-year at the end of 2020, hitting an eight-year low for that point in time. All wheat stocks were down 4 percent year-on-year on December 31, hitting a three-year low.

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