Canadian Drought Cutting Into Oilseed Profits at Glencore, Bunge

After spending millions on expanding in Canada, the biggest oilseed processors in the world are seeing profits fall to their lowest point in two years due to drought on the Prairies.

Bunge has doubled its processing capacity at its facilities in Altona, Manitoba, and Fort Saskatchewan. Cargill has built a new plant in Camrose, Alberta. Viterra Inc., the handler owned by Glencore, announced last month that it has bought eastern Canada’s largest oilseed processing plant for C$190 million, and Richardson International spent C$30 million to expand its processing plant in Yorkton, Saskatchewan. At the same time, yields in Saskatchewan and Alberta have suffered due to dry conditions, driving up canola prices by 5.8% this year as competition for oilseeds has become aggressive.

This combination of factors has caused August crush margins to fall to C$41.40 (US$31.30) – the lowest since June 4, 2013, according to ICE Futures Canada, meaning some companies that invested heavily on expanding their capacity in the country will likely be operating at a loss.

Inventories from last year’s harvest have fallen 23% compared to a year earlier according to a government report issued September 3, and due to ‘excessively dry’ growing conditions, Canada’s harvest is on pace to fall to its lowest in five years, according to Statistics Canada.

Companies have invested in their Canadian processing operations due to the long-term positive outlook for the industry, but as margins tighten and demand slows from China due to that country’s economic slowdown, they will face some near-term challenges.

Processors in the country have been running at approximately 65% capacity since August 1 – down from 90% before margins began to fall according to David Reimann, market analyst with Cargill, Manitoba, who adds that total crush will likely fall last year’s 7.3 million tons if canola prices remain high.

More on this story