Profits on grains and oilseeds might be down, but it’s no reason to panic.
Speaking at Farm Management Canada’s Agriculture Excellence conference in Winnipeg, Farm Credit Canada’s chief economist said the high prices of recent years were never destined to become the new normal.
“The sky is not falling, it’s not falling at all,” J.P. Gervais said. “We still have some pretty decent margins, it’s just that the last few years we had record profitability.”
The profitability of the last few years was so exceptional, it’s likely the kind of phenomena seen only once in a generation, he noted.
Canada’s growth opportunities and price drivers remain in its export markets.
He said crops that have had quality issues overseas, like peas, are seeing greater profit margins this year. He also noted that Eastern Canada will see prices lower than those in the West.
“If you move east and you look at corn, wheat and soybeans, you’ve got much tighter margins,” Gervais said.
That’s largely due to the effect that the American situation has on the East.
While the U.S. economy is looking brighter than it has in recent years, the economist said that hasn’t resulted in an increased food demand — possibly because half of American households are actually worse off today than they were in 2007.
If you want a place where both food demand and the economy are growing, China is still the place to look to, Gervais said.
“China at this point last year captured 60 per cent of the oilseed trade,” he said. “We could go on and on about China, and when I talk to our customers about China I can see them roll their eyes… not again. There’s Chinese fatigue out there, people get fed up hearing about China, but that is a big deal.”
China’s growth rate is now slowing down, which Gervais said is a positive given how extreme its economic growth has been.
“I would argue it’s not an issue for us,” he said, adding its growth rate had not been sustainable.
For producers hoping for an upside to soybeans and canola in the coming months, large stocks left over from 2013 will likely decrease prices further. But not all decreases are equal.
“I really do think though that there is more downside to soybeans than there is upside to canola, I think it’s fairly priced right now,” said Gervais. “So I would caution against thinking that canola is on its way up too much.”
But he added that canola exports are trending upwards, which is positive.
Demand in the export markets will also determine the price of wheat for Canadian product in the coming months, he added, noting that quality issues may play a role in export demand.
Those looking to corn for comfort should look elsewhere.
“The corn situation actually is really complicated,” said the economist. “Because right now in the United States you have two surveys that are saying opposite things, and both surveys are actually managed by the USDA, so it’s actually quite something.”
Growers shouldn’t look to the ethanol industry for a price hike either.
“We’ve got this huge crop coming in, but I don’t think ethanol is going to capture any of that,” Gervais said.
“Last year was an amazing year for the ethanol industry, I just don’t think there’s any growth compared to last year, I don’t think there is any downside, but I don’t think it’s going to grow,” he said. “We’ve got this huge crop coming in, but I don’t think ethanol is going to capture any of that.”
The one corn market that is showing signs of growth is the export market, particularly for livestock feed as demand grows in places like China.
FCC recently released a report on global trade, which shows how important exports are to a country like Canada — a nation that produces far more than it can ever consume.
“When viewing Canada’s agriculture trade numbers through the lens of this country’s population, a clear picture emerges,” said Gervais. “It shows the agriculture sector is more important to Canada than all other countries, including the United States, Australia and the European Union.”