China has hit Canada with a new round of canola tariffs, threatening one of Western Canada's biggest cash crops and causing potential issues for farmers looking to sell their crops. The tariffs were announced overnight Monday in China, meaning that people watching the agriculture markets were in for quite the shock Tuesday morning.
Chuck Penner, founder of Left Field Commodity Research, was watching the markets and says much of the agriculture sector saw this coming.
"China announced some import tariffs on Canadian canola at 75.8 per cent. We didn't really know what the amount would be, we didn't know what the timing would be, but for quite a while we've had this expectation that China would follow through on their threat of tariffs that they started talking about a year ago."
The tariffs officially take effect on Thursday, with Penner noting this isn't the first bit of canola trouble with China.
"Back in March, I believe China announced 100 per cent tariffs on canola oil and canola meal, and now this is on canola seed. So it's the third leg of the market. It effectively means very, very low volumes of those would be going into China."
The early impact of these tariffs is, as Penner puts it, "not very good", with an initial drop already affecting the sector.
"When I woke up this morning, I saw that canola prices were off, the canola futures were off about $35 to $40 a ton and then some. One point in the morning, they dropped down $45 from yesterday, and that's the limit that the futures can go in a single day."
"By the end of the day, prices were down only - if you want to call it that - only $30 a ton. So if there was any bright news or silver lining is that the prices dropped very, very sharply and now they're still down a lot, but a little bit of a sign of that may have been overdone early on."
While $45 doesn't sound like a lot outside of the canola market context, Penner says that the impact would be sizeable across Canada's market.
"If you were to take the $45 drop, which is what they were down to at one point, by 20 million tons, that's about $900 million. So yeah, it's a very, very huge loss in the size of the 20 million ton crop it's coming off this fall. It's in that ballpark of $900 million. So we'll see how things develop over the next little while."
Penner does expect that the sharp initial reaction will eventually correct as the canola trade shifts to other countries to compensate.
In the meantime, he stresses that producers should wait it out for a little bit as the market corrects itself.
"Don't panic, don't drive the price even lower by selling at this point again, the market is very good at finding other outlets for exports, and so the situation will start to improve. It's still not great, don't get me wrong, it's not wonderful by any means, but the market will start to move around, so we'll start shipping increased volumes of canola to other countries, and so it's going to help alleviate the hurt that we're seeing from this China decision."
Penner says the impact may also be exaggerated thanks to the timing, as the harvest is beginning and canola volumes are high.
"This decision at this time of year will probably have the greatest negative impact on prices right now. If this had been announced in spring, when prices were much stronger and supplies were extremely low and the harvest wasn't about to come off, it might not have had the same impact. It may be even a little bit exaggerated at this point, but there's going to be volatility and bouncing around prices."
Penner says that even in the short term, it's hard to predict exactly what will happen, but he says prices will likely recover in the future.