While Kazakhstan seems to be king of European flax production, is Russia its queen?
Since the Black-Sea region is one of the world’s largest producers of flax and one of Canada’s main competitors on the flax exports, we wanted to take a look at what’s going on there.
In our assessment of the Kazakhstan flax market, we also walked through a couple of the main data points as it relates to the flax market in Russia.
As a reminder, Russia’s flax production expanded from 350,000 tonnes in 2012/13 to 700,000 tonnes 2016/17.
But in 2017/18, Russian acreage shrank by 20% to 1.4 million acres while production dropped by 35% year-over-year to 450,000 tonnes.
If we think about Russian flax prospects overall, it’s a bit wacky.
As mentioned, there were the weather issues that weighed on the Russian production last year. Also, flax is no longer appealing for Russian farmers due to the fact that value-added processing in Russia remains at a minimum level.
Put another way, the Russian flax market is purely export-oriented. As a result, it is very volatile and unpredictable.
Also, the tightening of phytosanitary requirements for flax oil by European importers has had a negative impact on Russia’s flax prices for export.
Another factor influencing flax markets in Russia is that planting sunflower and soybean is a more profitable option.
Lastly, some sources say that the prohibitive import duty placed by the Turkish government on flax oil has completely shut the door for Russia. This is significant since Turkey has historically been the largest buyer of Russian flax
Clearly, the outlook for Russian flax is bearish and this could be considered a positive for Canadian options (albeit we still have to recognize Kazakhstan).
From an export standpoint, so far in the 2017/18, the Canadian Grain Commission has put Canadian flax exports at 198,000 tonnes. This basically matches where we were at this time a year ago (200,000 tonnes), but it is about 14% behind the three-year average of 230,000 tonnes.
Put another way, Canada’s grain handling system will need to run at a very fast pace to achieve Ag Canada’s export target of 500,000 tonnes in 2017/18.
That being said, the pace of exports will need to get to at least 14,000 tonnes a week to reach this goal. Based on some seasonality in March and April, this seems possible to achieve.
However, one bearish factor is that the two big buyers of Canadian flax in March, China, and the US, are out of the market this year.
Also not in the North American flax farmer’s favor is that we think that Kazakhstan’s flax acres will remain at the current level or are set to expand in 2018/19.
However, Russian flax acres in 2018/19 is expected to shrink. Russia may or may not be an active player on the world flax export market which may be supportive for flax producers here in Canada.
With all of the above in mind, the upside potential for flax prices is a bit limited.
However, this will come down to the buying pace by traditional buyers in the US and China, which are really the two wildcards since the market seems to be pricing in the bearishness that is Kazakhstan and the noise that is Russia).