Here We Go Again: A Potential Billion Dollar Hit to Canada's Canola Supply Chain from Chinese Trade Actions

China recently announced it will open a trade probe into canola seed imports from Canada, the world's largest canola producer and exporter, which could result in China levying tariffs on the crop. In this commentary, we explore the potential effects on Canada's grain handlers and the canola supply chain more broadly.

Key Highlights
-- While there is no certainty on when (or even if) China will levy tariffs, how meaningful they could be, and for how long they would remain in place, the tariffs could have a meaningful impact on global canola trade flows and by extension Canada's grain handlers.
-- Even in the event of meaningful tariffs, we anticipate global trade flows to ultimately rebalance as volumes shift to and from other geographies to satisfy global demand.
-- Acknowledging short-term volatility and some negative earnings pressures, we anticipate a canola-related trading action will not have a material adverse effect on the long-term credit risk profiles of most Canadian grain handlers.

"We believe the Canadian grain handling industry is better positioned to navigate a potential trading action than in 2019, considering its more diversified and better established customer relationships into other geographies as well as gradually increasing domestic processing capacity," said Moritz Steinbauer, Senior Vice President - Sector Lead, Corporate Ratings, Diversified Industries at Morningstar DBRS. "Nevertheless, a material trading action could be costly for the industry over the near term until trade flows rebalance and highlights the importance for grain handlers to handle a diverse set of commodities, have adequate infrastructure to respond to shifting trade flows, have diversified customer relationships, and tap into auxiliary and/or vertically integrated businesses, such as canola crushing."