Analysis-Australia could be canola trade winner if China gets over fungus worries

By Peter Hobson, Naveen Thukral and Mei Mei Chu

CANBERRA/SINGAPORE/BEIJING (Reuters) - Australia would be the likely winner from a shift in global canola trade flows should China impose tariffs on Canadian imports of the oilseed, but Beijing will need to overcome their worries about a fungus.

China, the world's biggest canola importer, has disrupted the market by announcing an anti-dumping investigation into canola from Canada, the world's biggest exporter of the oilseed used for cooking oil, fuel and animal feed and China's biggest supplier.

The canola trade between the two countries is worth about $2 billion a year.

However, to access canola from Australia, the world's second-biggest exporter, as a replacement, China would have to reconsider requirements for testing of cargoes for blackleg, a fungal disease present in Australian crops.

Chinese quarantine rules designed to stop blackleg spreading in China have blocked Australian canola shipments since 2020.

"China doesn't have many options," said Ole Houe, director of advisory services at IKON Commodities in Sydney. "They'd pretty much have to come to Australia for canola. Supplies in the European Union and Ukraine are tight. Russia has a bigger crop but not enough to satisfy all Chinese demand."

China says its investigation should be complete before Sept. 9 next year but could be extended for six months.

Chinese canola buyers are already shying away from signing new contracts for Canadian imports, with two trade sources saying that no new deal has been signed since Beijing announced the investigation in early September.

"It has completely paralysed canola trade between China and Canada," said one of the sources, a trader at an international trading company that sells canola to China. "Importers are worried about existing deals."

Canola , known in Europe as rapeseed, is widely grown in Canada, Europe and Australia, where its distinctive flowers turn fields into carpets of yellow.

It is crushed to produce cooking oil and other products, including renewable fuels, and meal for animal feed.

Around 40% of Canada's canola exports typically go to China, accounting for 90% of China's imports of the oilseed.

Blackleg, a fungal disease that damages plants and reduces the oilseed yield, has been at the centre of several disputes over Chinese canola imports from Canada and Australia.

Before the most recent halt, China stopped Australian imports from 2011 to 2013 over blackleg while Canadian shipments were limited in 2009 over concerns about the fungus, which does not harm humans.

China could quickly tap the Australian canola market by adjusting its rules.

"China would have to amend their blackleg requirements in their import specifications. They could easily do this. It's just a matter of changing it," said Rod Baker, an analyst at Australian Crop Forecasters in Perth.

Canberra is working with China to resume canola exports and the two governments agreed in June to conduct trial shipments, an agriculture ministry spokesperson said.

These trials involve processing imported canola near its port of arrival to stop potentially blackleg-contaminated material crossing rural land, said an Australian industry source, something already done for Canadian imports.

Australian trade data show 500 metric tons were sent to China in June.

BLACKLEG PROBLEMS

Blackleg is present in Canadian canola as well, but exporters sieve their seeds before shipping to China to remove chaff, broken seeds and other material that can be infected with blackleg, which Australia does not do.

China requires 1% or less of these impurities, known as admixture, in its canola imports, said Nick Goddard, CEO of the Australia Oilseed Federation.

Australian delivery standards allow up to 3% admixture but most farmers produce levels closer to 1%-1.5%, said Andrew Weidemann, a director at Grain Producers Australia.

At the same time, analysts note that Australian producers don't need to ship to China as they currently export to other markets at higher prices.

"We have other options than China," said Vitor Pistoia, an analyst at Rabobank in Sydney. "A large share of Australian canola is not genetically modified, which means it's a premium product and markets like the European Union will pay more for it."

Almost all Canadian canola is genetically modified.

Still, China has few options outside Australia to replace Canadian canola if its investigation eventually leads to a ban.

Imports of canola oil and meal would be more costly and impact its seed-crushing industry. China could import canola seeds from Ukraine and Russia, but they ship less than Australia and most Ukrainian shipments are sent to the EU, whose import demand rivals China.

Blocking Canadian canola imports would likely mean China pays more for cargoes to draw them away from the EU and other markets.

"We would expect to see an increased demand for our product and a positive pricing outcome," said Mark Fowler, who grows crops including canola in Western Australia.

Australian canola is currently more expensive than Canadian.

Australia's shipments are typically pegged to the European market, said Goddard at the Oilseed Federation. European Commission data assessed Australian canola exports at 448.76 euros ($501) a ton as of Sept. 25, versus Canadian exports at 436.56 euros.

($1 = 1.4526 Australian dollars)



($1 = 1.3480 Canadian dollars)

($1 = 0.8951 euros)

Source: Investing.com