There has been a tremendous amount of fanfare and anticipation regarding the intended expansion of canola crushing capacity on the Canadian Prairies, driven mainly by expected demand for renewable diesel across North America.
Companies such as Cargill, Richardson, Federated Co-op, Viterra, Bunge, and Ceres Global Ag have all jumped into the fray, announcing hundreds of millions of dollars in aggregate investment over the last few years. There has been similar planned expansion for soybean crush in the United States based on the same dynamics.
While Ceres Global Ag has since suspended its plan for a new canola crush plant at Northgate, Cargill, Federated Co-op/AGT, Richardson, and Viterra are all moving ahead with construction in Saskatchewan. Bunge has also invested in new capacity at existing facilities in Western Canada. Altogether, these projects are still projected to boost crush capacity in Western Canada by at least six million tonnes per year — a 50 per cent increase.
While policies like the Clean Fuel Regulation (CFR) in Canada, the Renewable Fuel Standard (RFS) in the U.S., and emissions policies in individual states like California are expected to drive demand, there are mounting reasons to question how much of this intended capacity actually gets built. Here’s why:
- Inflation Reduction Act (IRA) – This multi-trillion dollar piece of U.S. legislation is greatly impacting on which side of the Canada-U.S. border new investment is landing, due to incentives, tax breaks, and funding from the U.S. government. According to McKinsey, the IRA will invest US$250 billion in energy, US$46 billion in environment, US$23 billion in transportation, and US$20 billion in agriculture. On RealAg Radio, John Stackhouse of RBC Royal Bank, made a strong case for Canada to build out competitive responses to the IRA or risk losing significant capital investment. This could affect crush capacity, similar to decisions that are being made on whether a pulse crop fractionation/ingredient facility is built in Saskatchewan or Montana.
- Economic slowdown and rising cost of capital – Central banks in Canada and the U.S. have raised interest rates to combat inflation, which has altered the cost of capital calculations for builders of the crush facilities. Although the majority of the crush capacity is intended to be built by large global companies that are flush with cash, the capital investment budget is finite and competitiveness for that capital internally is high. The current interest rate environment changes return calculations for some of these projects in comparison to when they were first announced. Additionally, a changing legislative landscape, combined with interest rate changes may have shifted the risk profile for some of these investments.
- EPA’s final rule on 2023, ’24 and ’25 RVOs – In what some described as a buzzkill, the EPA disappointed many in the renewable diesel sector with its required volume obligations (RVOs) in late spring. This variable impacts the entire North American sector, whether that renewable diesel is produced in Canada or the U.S.. Due to the RVOs only being provided until 2025 these disappointing volumes can be viewed as a short-term setback or an indication that future for the sector is not the reality the largest boosters have been professing.
- Canola supply – This has been a concern since all of the planned crush capacity was announced. Canola acres are proving to be capped at 23 million acres. 2018 was the highest acreage at 22.8 million. Therefore, production expansion must come from yield growth, and Mother Nature has made that incredibly difficult to prove to be possible no matter the improved agronomic knowledge. In the last ten years, canola production has been at or below 16 million metric tonnes, which is on par with the possible crush capacity. The 2023 canola crop is likely to keep that streak alive. Canola is the preferred feedstock for renewable biodiesel, as it produces three times the oil per acre in comparison to soybeans. The closer the domestic crush capacity is to the production number, the better the basis and competitiveness of bids for farmers.
- Politicians speaking against the Clean Fuel Regulation – We can expect strong messaging from the Conservative Party of Canada against the CFR, which they’ve dubbed “Trudeau’s second carbon tax,” leading up to the next election. The louder this messaging gets without the Conservatives explaining the nuance of whether they are pro biofuel or not, the greater the political risk is for the investment. We have already seen Premier Scott Moe of Saskatchewan and the premiers of Atlantic provinces speak out against the CFR in parallel with Conservative leader Pierre Poilievre. The irony is that one could argue without a CFR-like policy, the intended canola crush capacity expansion in Moe’s province would be much more tempered. Without a well-laid-out CFR replacement, if and when the Conservatives form government, the political risk in Canada could force the new plants to be built in the U.S.
You’ve heard of Trudeau’s first carbon tax—the one that will cost 41 cents-a-litre & $1500 per family.
Now he plans a second carbon tax—that he calls a fuel standard.
How much more will you pay? pic.twitter.com/3gtWIaQdgI
— Pierre Poilievre (@PierrePoilievre) May 17, 2023
With canola being a preferred feedstock for renewable diesel and sustainable aviation fuel, Canada is well-positioned to participate in the renewable diesel industry as volumes increase, but I do believe what that looks like is still in flux.
Will Canada produce canola and export to the U.S. or will Canada crush the canola domestically? The answers lie in how well the companies, and provincial and federal governments steer through the above barriers. These challenges are not insurmountable, but are definitely threatening the planned expansion of domestic canola crush capacity.