A silver lining following challenging summer?

BMO report cautiously optimistic about the strength of the industry after hot, dry summer

Harvest projections are trending lower due to this year's drought conditions.

A new report from BMO Economics sheds some light on the economic impacts of the hot, dry conditions that persisted across North America this summer.

The report, issued on September 17, describes how the widespread growing challenges North American farmers faced this summer affected an agricultural sector still trying to make sense of the impacts of COVID.

“In both Canada and the United States, exceptionally hot and dry weather across the Prairies has curtailed crop yields and is dragging production of major products like wheat and canola to multi-year lows,” said Aaron Goertzen, senior economist, BMO Capital Markets. “But there is a silver lining: after years of excess supply, expectations of a smaller harvest have helped provoke a large increase in crop prices. Strengthening demand has also helped.”

That silver lining is partly because demand has remained surprisingly high throughout the pandemic, even when supply was abundant. The report notes that crop prices were mostly unaffected by the pandemic, but those prices were already low because of several years of strong harvests and declining exports in the face of the China-U.S. trade war.

“Fortunately for producers, all of that has changed,” reads the report. “With production and inventories easing, trade challenges largely resolved, and domestic demand in good shape, wheat, corn, and soybean prices all reached eight- to 10-year highs this year, while canola hit an all-time record.”

Livestock prices have been similarly resilient. The situation early in the pandemic, when the closure of meat-packing plants created a glut of animals on farms, was short lived. “With processing capacity back online and consumer demand strong, benchmark cattle prices have reached a five-year high this summer after dropping to a 10-year low last spring. In the hog space, prices have jumped from a 17-year low last year to a seven-year high this summer,” noted the report. Those lofty numbers have tamed a little but remain above recent norms.

But within Goertzen’s silver lining is still the black cloud of that hot, dry summer. Wheat yields are projected to be 33 per cent lower this year in Canada. Canola yields are expected to be down 37 per cent. And many livestock farmers had to cull their herds because of lack of suitable grazing land. So, while strong prices are great, they don’t help the farmer who doesn’t have product to sell.

Craig Klemmer, principal economist at Farm Credit Canada (FCC), says his organization is also seeing the trends noted in the BMO report.

“I think we’re going to have soup to nuts when it comes to this industry,” said Klemmer. “If you’re dealing with a low price locked in and now have to buy high-priced grain to fulfil that contract, that’s going to create a real drain on cash flow.”

On the other hand, that scenario is not a given. Many producers are positioned to take advantage of the higher prices and have mitigated their exposure to risk with crop insurance and/or by enrolling in the AgriStability program. Klemmer suggests these factors ought to help many farmers ride this out.

Still, the drought was widespread and hit Western Canada particularly hard.

“We’re sitting in a pretty tough spot here and I don’t think we can deny that,” warned Klemmer.

“We know production’s going to be way down. We are going to have to be innovative in terms of keeping things moving forward and hopefully we get a good recovery. So, we’ll have to see at the end of day, how this pans out.”

Klemmer expects a clearer picture to emerge in the coming months.

“Once all the crops are in the bin, we’ll have a much better idea of what production looked like,” said Klemmer. “And on top of that, we need to figure out what the quality is going to look like.”

The numbers will begin to trickle in late this year and early next year. But Klemmer notes that the first half of this year is still skewing the data somewhat and must work its way through the system.

“Prices were good. People were still moving last year’s crop and those don’t always show up in all the numbers,” he said.

Also uncertain at this time, but will become clearer in the coming months, is where input prices stand relative to the price of commodities.

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