Canadian Pea and Lentil Market Overview
The purpose of this research report is to review the current market situation and outlook for peas and lentils; and the new economics of Canadian cropping choices.
In 2023, the calculations of relative return on investment (ROI) can factor in new subsidies for increasing pulse crop acres. No longer are rotation, relative costs and market returns the sole determinants of comparing planting options.
Click through to this clear and succinct overview with links to the delivery organizations and each one’s areas of focus, to learn more about this new Canadian program, the On Farm Climate Action Fund.
Author’s Note: This research series is focused on connecting the dots for stakeholders in agriculture and food in the face of changing land management economics. Opportunities exist to gain strategic advantages at the farmgate from climate action programs, carbon & biodiversity trading platforms, and emerging premium niche markets.
Clearly, it’s more complicated than the way cash markets used to clear land allocation decisions. Stay tuned for Thursday’s report that will start to sort new government-funded practices into the categories defining current carbon offset credentials.
But first, let’s review the macroeconomic market backdrop for dry peas and lentils…
Prices for yellow peas and red lentils are off their highs. Acres are forecast to drop in 2023. Demand could as well.
As with most crops currently, Canadian export offers are caught on ‘an island of high price’ generating little interest from overseas buyers. Cheaper Australian supplies following the big harvest there is short-term bearish to global pulse values.
Uncertainty about demand into China and India are holding the markets relatively stable for now, as there is still lots of time before new-crop arrives, and these two destination markets have the potential to tighten up Canadian supplies considerably. Especially in recent years, purchases have been extremely variable from one year to the next.
Barring a major weather threat in 2023, numerous bearish demand-side influences point to a weaker outlook: glyphosate residue, inflation, Covid disruptions, and threats to intermodal shipping logistics. In addition, the rising cost of trade finance due to the increase in interest rates multiplies the cost of credit for grain companies, adding to the sales price (discouraging buying) and pressuring the purchase price.
For peas specifically, let’s look at the supply and demand situation currently…
The biggest headwind facing the pea market is possible new competition from Russian and Black Sea-origin yellow peas into China. Russian dry pea production is rising, and the two countries are in the process of negotiating a phytosanitary protocol. According to trade sources, that is the only barrier remaining between the Chinese market and Russian peas, which have the ability to move in by rail at a major cost advantage.
Chinese fractionation plants process mostly Canadian peas currently, reselling composites and isolates back into North America and other world markets. At competitive prices, feed peas from Canada would be used in China also, but that market has dried up due to recent high prices.
There has also been a change in fortunes for plant-based startups that buy yellow peas. Domestic fractionation plants sell into markets that are stagnating, making further expansion unlikely. And again, pea fractionation is also the sector that utilizes Canadian exports in China.
As with all crops, the trade in Canada remains short peas, i.e. more has been sold than bought in yet from producers, which is providing temporary short-term cash market support. Looking further ahead, there isn’t much incentive for traders to put new sales on the books. As the old-crop/new-crop inverse winds down, there could come additional spillover pressure on peas from overall weaker markets in 2023.
Now turning to lentils…
The main issue for lentils this year is competition from Australia, where acres and production have been ramping higher in recent years. According to trade sources and media quotes from other analysts, this year’s crop could top 1 million tonnes, compared to the previous five-year average of about 670,000. Global supplies are ample.
During Covid when container shipping capacity was cut dramatically, Canadian exporters couldn’t get lentils and other products into key markets across Asia. Demand and global price spreads shifted to incentivize production in nearby Australia. That generated a supply response, and now there is a steady marketing opportunity for lentils produced in Australia.
Weather concerns in Australia were one factor that pulled the market to its recent peak of about 35 cents/lb last fall, although in hindsight it could be that exporter short-covering was the bigger driver of that move. With those sales filled, traders have been hesitant to add new sales, allowing the Canadian red lentil market to slip 4-5 cents/lb in the past two months.
Demand into India could provide some stability in the months ahead. The focus will turn to weather in spring of 2023, but with stocks having rebuilt, prices will be less sensitive this year than in the past.
The OFCAF Math for Pulse Acres
The balance of factors in pea and lentil markets can be viewed as bearish, yet the Return on Investment (ROI) has help independent from market returns: federal funding to reimburse seeding expenses. Nitrogen fertilizer use is lower or nil on pulse crops, in the current and following year. To get a clear picture of the potential ROI in 2023, the OFCAF payments and the reduced 2024 nitrogen expense need to be taken into account.
For more on this, see last week’s report on the nitrogen fertilizer market outlook.
Perhaps the program caps still don’t make peas and lentils attractive from an ROI perspective compared to canola and wheat, when comparing single-year returns at broadacre scale. But if the area seeded is kept within the payment limits, expense reimbursements and future year fertilizer savings should be highly compelling for any size of farm.
In addition to peas and lentils, soybeans, lupins, chickpeas, and dry beans also qualify. Costs related to seed, inoculants, and custom application can be reimbursed up to a maximum of $35/ac.