1. Canola Cathy Guo Iris Han Mihaela Mardare Mark Liew

2. Presentation Outline 1. Introduction 2. Market Overview 3. Policy Impacts and Case Studies 4. Conclusions

3. Introduction What is Canola History of Canola Canada’s Trademark Canola Oil – Health Benefits and Dangers Canola Supply Chain Canola Oil/Meal Share vs Soybeans; over time

4. What is CANOLA? Canola was developed through conventional plant breeding from rapeseed, an oilseed plant already used in ancient civilization as a fuel. Canola refers to a cultivar of either Rapeseed (Brassica napus L.) or Field Mustard (Brassica campestris L. or Brassica Rapa var.) Its seeds are used to produce: - edible oil for human and livestock consumption - biodiesel http://www.oilmillplant.com/canola-oil-processing-unit.html

5. http://www.fusionrenewables.com/products-services/biodiesel/types/ Hundreds of years ago, rapeseed oil was used:  in Asia and Europe as a fuel in lamps  in China and India as natural (unrefined) oil Limited use until the development of steam power High demand - World War II  critical shortage Canada began to expand its limited rapeseed production After the war - demand declined sharply Farmers look for other uses for rapeseed and rapeseed oil History (I)

6. In 1956 - rapeseed oil extracts were first put on the market as food products but suffered from unacceptable characteristics: – disagreeable taste – greenish colour (due to the presence of chlorophyll) – high concentration of erucic acid (considered to cause heart damage) – not appealing to livestock (sharp-tasting compounds) http://wallpapertube.com/photography/rapeseed-field-by-daniel-schwen-wallpaper History (II)

7. Canola = Canada’s trademark Originally Canola was bred naturally from rapeseed at the University of Manitoba, Canada in the early 1970s, => different nutritional profile  much less erucic acid Name "CANOLA" <= "CANadian Oil, Low Acid" in 1978 In Canada, an official definition of canola is codified in Canadian law 1998 is developed the most disease and drought resistant Canola variety (using genetic engineering) In 2011 -> 96% of canola crop grown in Canada was genetically modified

8. Canola Oil Nutrition Facts Health benefits: contain some essential fatty acids - have beneficial effects on the heart and cardiovascular system significant amount of omega-3 and omega-6 fatty acids – may increase the level of good HDL cholesterol in the body improve immune functions and promote brain health contain a small quantity of saturated fats => is considered as a superior oil than many other commonly used cooking oils http://www.doctorinmyhome.com/2010/07/canola-oil-nutrition-facts/ http://pacificcoastcanola.com/canola_demand.php Canola oil nutrition facts and safety has become a controversial issue with no definite answer.

9. Dangers of Canola Oil Side effects: xderived from a hybridized, genetically modified rapeseed plant xcontains erucic acid -> cause heart damage and produce free radicals xpresence of trans fats in canola oil -> have an increased risk for cancer and heart disease xit has been shown to cause lung cancer (Wall Street Journal: 6/7/95) xmanufacturing process:  involves the use of solvents that have adverse effects on human health  can alter the content of omega-3 fatty acids Side effects: xderived from a hybridized, genetically modified rapeseed plant xcontains erucic acid -> cause heart damage and produce free radicals xpresence of trans fats in canola oil -> have an increased risk for cancer and heart disease xit has been shown to cause lung cancer (Wall Street Journal: 6/7/95) xmanufacturing process:  involves the use of solvents that have adverse effects on human health  can alter the content of omega-3 fatty acids http://www.pristinegourmet.com => extra virgin / cold pressed canola oil is recommended

10. Retail: $3.82 /1.42L $2,920 / MT Farm: $645/mt Wholesale: $1303/mt USDA Oil crop yearbook (2011) Amazon.com Canola Supply Chain RapeseedOilFoodNon-FoodIndustrialBiodieselMealFeedstock

11. Oil/Meal Share (Canola vs Soy) Based on Chicago prices for soybeans and Vancouver FOB prices for Canola Crush Me for Oil Crush Me for Protein

12. Historical Oil Share (Canola vs Soy) Up to 20% variance in oil share historically

13. Market Overview Global Vegetable Oil Production, Rapeseed Share Yields across the World; over time World Production and Consumption (S&D) World Trade - Major players Canola Major Markets Canola Price Trends

14. Vegetable Oil Production After soybean and palm, rapeseed and canola together have become the third leading source of vegetable oil in the world in the last two decades. http://www.fas.usda.gov/oilseeds 2000: 14 mil MT 2012: 24 mil MT

15. Note: Domestic supply = ending stock of last season + production of this season. Thus we use production data here not the supply data. Data source :USDA Rapeseed World Supply and Demand – 2011 Producers CountryMil MTPercentage EU-2718.831.1% Canada14.523.9% China13.422.2% India6.510.7% Australia2.84.7% World60.5CR5: 92.6% Consumers CountryMil MTPercentage EU-2722.535.4% China16.726.2% Canada7.311.5% India6.910.8% Japan2.43.7% World63.5CR5: 87.9%

16. Rapeseed World Trade Viewed by Countries - 2011 Export CountryMil MTpercentage Canada8.769.7% Australia1.512.3% Ukraine0.86.2% USA0.21.9% EU-270.11.0% World12.5CR5: 91.1% Import CountryMil MTpercentage EU-273.628.1% China2.620.6% Japan2.418.5% USA1.411.2% Mexico1.411.0% World12.7CR5: 89.4% Total rapeseed product = (seed + meal + oil) Fairly thinly traded Traded Quantity = 12.5 / 60.5 = 20.7% Data source :USDA

18. Canada Australia Ukraine

19. What? Canada doesn’t have the highest yield? In decreasing order of production Because of the harsh winter, Canada grows Spring Canola, while EU and China grow Winter Canola. Winter Canola has higher yields because it flowers at a more optimal temperature and season than Spring Canola (summer)

20. Productivity Gains – Fertilizer and Genetics

21. Markets for canola Futures markets:  In North America, canola is traded on ICE Futures Canada (formerly Winnipeg Commodity Exchange)  In Europe, rapeseed is traded on the Euronext-Liffe exchange (now NYX)  In China, rapeseed Oil is traded on Zhengzhou Commod Exchange (ZZCE) Physical OTC Markets:  FOB Vancouver (Seed/Oil/ Meal)  FOB Rotterdam (Oil)

22. Canola Price Trends (Canada vs Europe) High degree of freedom of trade between EU and Canada. EU banned Canola for food, still uses for Biofuel

23. World Policies/Case Studies 1.North America – Price Trends (Substitution) – Trade Flows (LOOP) – GM Market Power 2.European Union – Biofuel regulation and its impact on markets – Seasonality and Blending Economics 3.China ( 中国 ) – Price Stabilization Policies – Protectionism

24. North America: Home of GMO Crops

25. Canola Price Trends (vs Soybeans)

26. North America Growing Regions Canada: 99% of canola crop is grown in Alberta, Saskatchewan, Manitoba and BC (peace river) USA: 90% of the canola crop is grown in North Dakota. http://www.canolacouncil.org/markets-stats/industry-overview

27. Yields across the Prairies

28. Where is the crop going? (Law of One Price)

29. 90% 90% of Canadian Canola is exported out of Vancouver to Japan, China and Mexico. The other 10% goes to the USA and east of from Ontario to the EU

30. Market Power in N America The ABCD of Oils & Grains Processing and Trading A – ADM B – Bunge C – Cargill D – Dreyfus (Louis Dreyfus) Retail: $3.82 /1.42L $2,920 / MT Farm: $645/mt Wholesale: $1303/mt USDA Oil crop yearbook (2011) Amazon.com Monopolistic profits in mid- downstream sector here

31. Banning GM Foods Several countries have banned GMO foods including GM Canola, including: Several European countries (led by Germany) Japan Australia New Zealand Price difference between Natural Canola and GM Canola Australia : Natural Canola trades at ~ 6% premium to GM Europe : No mention of this => Biofuel Policy is key

32. EU: Biofuel Policies

33. Biofuel Mandates in the EU EU Biofuel Consumption Blend Quota2011 France7% Germany 6.25% Italy4% Spain7% UK4%

34. Biodiesel Share of Vegetable Oil Demand

35. Biodiesel Share of Rapeseed Oil Demand

36. Rapeseed Oil vs ICE Gasoil (Diesel) EU commissions biofuel as part of energy policy

37. Correlations in price movements Pre vs Post-biofuel legislation

38. Canola and Wheat production substitutes

39. Rapeseed Oil vs GO and Wheat (Fuel) (Food) Prices: RSO: FOB Rotterdam GO : ICE Gasoil Wheat: Milling Wheat – EU origin

40. Biodiesel affects Wheat Prices through RSO

41. Crushing Capacity Squeeze Sources: Rapeseed Oil Price: Fob Rotterdam, source : bloomberg Rapeseed Price: Euronext futures, Fob France/Germany/Belgium

42. Biodiesel Demand Creates Blending Opportunities

43. In Summary, EU Biofuel Policy is about Greenhouse Emissions Energy Security Europe Crude Oil Production

44. China “So an army perishes if it has no equipment, it perishes if it has no food, and it perishes if it has no money.” – Sun Tzu, Art of War “To the ruler, the people are heaven; to the people, food is heaven” 王者以民为天，而民以食为天 - Book of Han “An army marches on its stomach” “C'est la soupe qui fait le soldat” – Napoleon Bonaparte

45. COFCO(SOE) makes contribution to Price stabilization  Price Floor and Farm Subsidies  Restricting Biofuel production  Adjusting consuming quantity Domestic industry protection  Purchase from farmers at higher price than P W  Restrict import quantity China Policies Using a private SOE to purchase agri products instead of a direct Government purchase

46. COFCO (SOE): the largest domestic company involved in purchasing from farmers, processing, marketing, bio-fuel production in China controlling shareholder is the country China Agri-Oil Holdings Limited (CAIHL)  is the subsidiary of COFCO, responsible for oilseed processing, biofuel and beer production  30% of market share in oilseed processing Kerry Oils & Grains  is a subsidiary of SG-listed Wilmar Group  has the lion’s share of the processing market at 45% Oilseed Processing: Oligopoly Market Share of Oilseed Processing

47.  COFCO supports domestic Rapeseed farmers  with a planting subsidy (CNY150/ha)  with a guaranteed floor price (2011:730$/mt) This has led to a ~$600 Canadian export price (FOB Vancouver) The $130 difference can be accounted for by freight and 9% import tariff in China  In 2011, COFCO purchased a grand 69% of the summer harvest (4 mil MT)  The Chinese Government’s buying decisions (both price and quantity) have important feedback effects on trade and world prices SaSa DaDa ES DbDb ED P1P1 Exporter (in $ terms) Importer-China World Mkt Q1Q1 D’ Price Floor and Subsidies: China S S-s China farmer subsidy 1. Price Stabilization Price Floor and Subsidies CIF China: $730/mt ED’ FOB Vancouver: $600/mt Freight and 9% import tariff

48. COFCO controls the biofuel production strictly under regulation of the government 1.Price Stabilization Biofuel Production Control

49. Regardless of the increasing consumption, COFCO controls the process of biofuel oil. It suppresses price by suppressing the demand of bio-fuel of canola, due to protection of food security and domestic price. 341 million liter=0.3million MT The total oil from canola is 40%* total production in 2012=5.2 million MT 1. Price Stabilization Biofuel Production Control

50.  COFCO controls the process of oil production of canola: => decreasing the production of oil when the market price of canola seeds is high => consuming a lot when the price is low (demand curve shift) In 2010, price was predicted to fall => purchasing amount was 5 million tons In 2011,price was predicted to increase => purchasing amount was 2 million tons S D new D P new P S D new D P new P ↗ ↙ 1. Price Stabilization Adjusting Consuming Quantities 2010 2011

51. Restricting imports as part of price controls In 2012, COFCO: purchased 4,000,000 MT, equivalent to 69% of the annual domestic production imported only 700,000 MT equivalent to 38% of total imports (even though the world price is much lower than the domestic price ) 2. Domestic Industry Protection Restrict Import Quantity Protection of Domestic Industries

52. SaSa DaDa ES DbDb S-s ED P1P1 Importer-China World Market Q D’ CIF China: $730/mt FOB Vancouver: $600/mt S ED-new Freight and 9% import tariff China farmer subsidy 2. Domestic Industry Protection Purchase From Farmers at higher price Q COFCO purchases canola seeds from farmer at $730/mt -> $130/mt higher than the world market price. -> part of this $130 is due to the 9% tariff on Rapeseed imports Protects farmers’ benefits, in case of suffering from price volatility

53. CONCLUSIONS

54. Conclusions America Europe China Profit Energy Food Largest Producer ≠ Highest Yield FOOD FUEL