Profit margins for 2020 are projected to be tight for Manitoba farmers, but it’s not all doom and gloom, say officials with Farm Credit Canada (FCC).
It’s hard to parse COVID-19’s impact on farmer expenses and revenues relative to other factors such as weather and commodity supply and demand, J.P. Gervais, FCC’s vice-president and chief economist, said July 7 during a webinar organized by the Keystone Agricultural Producers, with assistance from Manitoba Agriculture and Resource Development.
There are a lot of unknowns, including how long the pandemic will continue in Canada, and how soon Canadian, American and other economies will recover.
Nevertheless, Gervais and his colleague Marty Seymour, director of industry relations, pointed to a number of positives, including that borrowing costs have never been lower, the Canadian dollar is expected to stay low, there’s demand for Manitoba’s farm products and NAFTA’s replacement, the Canadian, United States, Mexico agreement (CUSMA), will provide some trade certainty.
Why it matters: Profitability will be challenging for Manitoba farmers this year, Farm Credit Canada projects, so efficient production is key. Meanwhile, Manitoba farmers have many things going for them.
“This has been agriculture’s moment to shine in terms of people understanding where their food comes from,” Seymour told the webinar.
“I see huge optimism for agriculture’s story to be told. So coming out of what can be seen as a massive blow to our industry (due to COVID-19) actually I think there’s some good news at the finish line.”
Canadian food already has a reputation for safe, consistent, high-quality food.
“One positive thing that leads me to really think that viability is positive for the long term in Canada is the fact that we face very strong demand coming out of the export markets as well as our own domestic market,” Gervais said. “In export markets, quality and reputation of products are becoming increasingly important.”
Quality products mean Canada is well suited to pursue upper, middle-class markets, Seymour said.
FCC expects 2020 Manitoba farm cash receipts to hit $6.54 billion, just down slightly from 2019, Gervais said.
“Overall it’s going to be a really tight situation,” he said. “Some of the downward pressures in a lot of different commodity markets… you’re looking at lower margins so efficiency is a really big driver of profitability in… this current context.”
Roughly 60 per cent of Manitoba farm cash receipts comes from crop production and the rest from livestock.
Wheat prices started the year strongly, but have been up and down since, due to COVID-19 concerns, Gervais said.
American corn prices, which will be affected by U.S. corn production and demand, could affect Manitoba wheat prices.
U.S. corn prices have declined, reflecting a 30 per cent drop in ethanol consumption in the U.S. as fewer people are driving during the pandemic.
Canola futures, which have ranged between $450 and $475 a tonne, have some upside, Gervais said. China, formerly Canada’s biggest canola buyer until March 2019 when it dramatically reduced imports, remains a canola market driver, he said. However, Canadian canola exports to the European Union are up 50 per cent, Gervais said. However, Canada can expect competition in that market from Ukraine and Australia.
The longer term also looks promising for canola, Seymour said.
“We have a huge amount of (Canadian processed canola) oil that’s still going into China (despite a drop in seed business),” he said. “That southeast Asia appetite for canola oil is real.”
India, where the demand for pulse crops is up, has cut pulse import tariffs for some countries, including Canada, Seymour said.
“(It) is slowly but surely starting to pick up again,” he said.
There’s more investment in pulse processing in Manitoba, including Roquette’s new pea plant near Portage la Prairie, he said.
“I like where that is headed long term for investment…”
Slaughter cattle and hog producers can expect continued negative margins, Gervais said.
The Canadian fat cattle slaughter backlog is more than 100,000 head, Seymour said. Producers are losing around $300 a head.
“The bleeding is not done as we try to plow through slaughter,” he said. “What I am inspired by is that the (slaughter) plants have done a great job on putting protocol in place to put distancing in the plants, and really vigorous testing, and temperature testing on staff.”
Seymour expects it will take until year’s end to clear the backlog.
However, that doesn’t necessarily mean calf prices will tank this fall.
“The reality is the pent-up demand (for beef) and prospect for strong demand going into the future years is still positive and I would think this is going to have a major impact on fall calf prices,” Gervais said.
Based on current futures prices for feeder cattle Gervais said he expects at least break-even calf prices this fall.
“It really is an open question for sure.”
“We’ve seen this in the cattle cycle before,” Seymour said. “It’s not necessarily linear. But the one I am watching is all the U.S. cattle that went to grass to buy time. These cattle have to come in at some point and go to slaughter.”
Beef has been consumers’ favourite meat and now that preference is higher than ever, Gervais said.
“I do think one of the silver linings is the strong demand for beef,” he said, but added prices have been rising faster than for other meats.
“One of the things to watch out (for) is food inflation, especially when it comes to beef.”
Grocery store beef prices were up 13 per cent in May versus May 2019, Gervais said in an email.
Farmers have no control over retail beef prices, nor does food inflation help farmers, he said.
Retail beef prices will go down as the backlog in slaughtering is reduced, Gervais said.
“But I don’t expect them (prices) to come all the way down to that three or four per cent range,” he added. Retail beef prices were already up six or seven per cent before COVID, he noted.
Some of the price increase comes from higher costs for packers and retailers due to the pandemic, Gervais said.
COVID-19 disrupted Canada’s dairy market more than Gervais expected. CUSMA, which will allow more American dairy products into Canada will also affect the sector. And there’s uncertainty about how much dairy farmers will be able to earn exporting surplus skim milk.
“The bottom line is I do expect margins to remain positive in the dairy sector,” he said.
Canadian farm debt was up 8.4 per cent last year, but borrowing costs have never been lower, Gervais said.
“We expect interest rates to remain low for some period of time,” he said.
Gervais expects the Canadian dollar to average 72 cents against its U.S. counterpart this year.
“I do think this will be positive for us… because it does have a positive impact for profit margins for crop producers and livestock producers,” he said.
Manitoba farmland prices, already considered expensive relative to expected farm cash receipts, on average, were up four per cent in 2019, Gervais said.
Manitoba land values are “a good 20 per cent above average of what we historically have seen over the last roughly 15 years and more.”
“We’re seeing very little movement in farmland values so far (in 2020)…” Gervais said, adding he expects land prices to remain stable this year.
“I would say buyers are a lot more cautious now…”