Where Are Peas Going? - PulsePoint
August 17, 2018
Market potential for Saskatchewan peas
By Marlene Beorsch, Mercantile Consulting Venture Inc.
As the Canadian pa crop is being harvested we are reflecting on what has been an eventful year. First, there is the debacle with India’s pulse market last fall. Second, given the market disruptions, we expect forward sales of peas for the late summer/early fall this year to be a lot smaller than in recent years.
Graph 1 gives a visual presentation of how Canada fared in pea export markets by destination in the 2017/18 crop year compared to 2016/17. As of the end of May (latest data available), pea exports were 1.2 million (M) tonnes lower in 2017/18 than in 2016/17 (also to the end of May). It is no surprise that by far the biggest reductions in exports occurred to India (down 1.5 M tonnes) and to Bangladesh (down 255,000 tonnes). On the upside, we shipped 495,000 tonnes more to China and 171,000 tonnes more to the United States (U.S.) than the year prior. These four countries represent the big swings in recent demand. But it is perhaps noteworthy that pea exports to all other major destinations except the Philippines were down as well.
It is important to understand the reasons behind the demand changes. For India, these are twofold. The first and key reason is political. Last fall, the Modi government in India decided to bow to lobbying and political pressure to help Indian importers/ traders with massive stock holdings in a falling market. The tools used were protectionist measures (phytosanitary practices, tariffs, and quotas) to slow and then virtually halt the inflow of peas to India. This was to stabilize and then raise domestic prices for peas. If that was the full intent of the measures, then they worked (for India) because domestic Indian prices for peas are now some $200 per tonne more expensive than available on the export market. The cost of the policies rests squarely on the shoulders of Indian consumers who now pay artificially inflated prices for peas. Unfortunately, the reason behind the financial burden on Indian consumers has not yet received a lot of attention or publicity in India. Farmers in India were told that the policies were also designed to raise overall pulse prices sufficiently to surpass the Minimum Support Price (MSP) set bythe Indian Government. Peas are a small crop in India, but farm prices in India for the bigger red lentil and chickpea crops have remained below the MSP promised by the Indian Government. In fact, the Government is reported to have purchased 1.5 M tonnes of new crop domestic chickpeas (nearly 17 per cent of the Indian chickpea crop) below the MSP, so farmers are not altogether happy either. Still, with a general election likely in India this fall, the Modi government is not expected to make major adjustments and stick to their current policies.
The second reason for smaller Canadian pea exports is an important one for Canada. Given good returns to pulse crops over the past several years, new competitors have entered the market and are competing for increased market share. Most important is the expanded competition by Black Sea suppliers, who have managed to displace some of our traditional demand for peas into India and other destinations. We note that Black Sea production increases are developing alongside much improved transportation and port fobbing capacity. Former Soviet Union wheat exports alone will reach 67.3 M tonnes in 2017/18, up 24 per cent (12.9 M tonnes) from just the previous crop year. In comparison, total Canadian wheat exports, excluding durum, will amount to nearly 16.5 M tonnes.
In Canada, we seem content to put up with virtually the same inland rail capacity every year, with very little attempt to allow for increases in exports to at least keep up the market shares achieved earlier. Bill C-49 will do nothing to fix this capacity problem. As long as we compete with other grains and other commodities for a given rail transportation capacity, we will not be able to meaningfully respond to spikes in demand. In addition, the tendency is to keep adding to overall inland costs without considering the effect on overall long-term Canadian competitiveness. Especially in years of falling prices, this Canadian attitude will make it harder and harder to compete internationally. Overall, given increased protectionism and increased international competition, there is little reason to expect major changes to the Indian pea market this fall.
China is one of the two countries where pea exports have increased meaningfully. In fact, China was Canada’s single biggest buyer of peas for the 2017/18 crop year, and we expected exports to have reached 1.6 M tonnes by the end July 2018. The conventional market for peas in China is primarily for starch (replacing mung bean) and snack food. This year, Canadian peas also have made inroads into the feed market as pea protein is priced favourably relative to soybean protein. Unfortunately, the strong buying posture shown by China in April and May slowed in June due to uncertainty about the outcome of ongoing U.S./China trade debates, so Canadian traders are worried about the lack of additional forward buying. We think the actions by the U.S. in mid-June (announcing another 10 per cent tariff on Chinese imports if Beijing proceeds to impose import tariffs on U.S. imports) will help to put Chinese pea purchases back onto the agenda. The much lower Canadian dollar and significantly increasing wheat and feed grain values will definitely help with new sales. Aside from the trade dispute, peas are still well priced to compete in to the feed market with other feed grains and with soybean protein values. In fact, we think they are currently priced too cheaply in Canada relative to wheat and barley. We expect that crop-year Canadian pea
shipments to China for both starch and feed use will again increase, especially if the escalating tariff threats on U.S. soybeans get implemented by China. We are currently using 1.8 M tonnes for pea exports to China for 2018/19, but the country clearly has the potential to substitute lost imports by the Indian subcontinent.
The U.S. market also has grown over 160,000 tonnes over last year and is using Canadian peas both for splitting (replacing U.S. peas used in the lucrative Food for Peace food aid program) and in the pet food markets. It is hard to split U.S. exports by usage, but the pet food usage especially stands to increase again next year. We believe domestic U.S. pea supply could fall by approximately 10 per cent to 900,000 tonnes due to lower 2017/18 ending stocks, which (barring trade barriers) should allow Canadian peas to feed into the splitting market and also into the growing pulse pet food markets. Mercantile is using the benchmark of 350,000 tonnes for Canadian pea exports to the U.S. for 2018/19.
A third destination where Canada has increasing pea sales is to our domestic market. Canada actually does not have good public data on the domestic use of peas. Statistics Canada uses the category more like a slush fund to balance their balance sheets rather than match pea disappearance with actual seed, feed, and fractioning usage. However, especially for the growing latter category, we can consider the capacity outlook for fractioning. According to our compilation of data for Verdient Foods Inc., Roquette, Canadian Protein Innovation, W.A. Grain & Pulse Solutions, and Prairie Green Renewable Energy, we expect the following pea processing capacity to come on stream, which should attract peas accordingly for fractionation. We currently project total pea usage to amount to roughly 3.9 M tonnes, with 2.9 M tonnes going to exports, 275,000 tonnes seed, approximately 500,000 tonnes to feed, and 260,000 tonnes to fractionation. This compares to 3.57 M tonnes for 2017/18. However, depending on the international trade environment this fall/ winter, exports to China could well exceed current forecasts.