Can a low loonie protect against falling commodity prices?

I’m expecting slightly lower agriculture prices in 2016 with global commodity supplies either growing or already oversupplied. This has, not surprisingly, lead to concerns about profitability voiced by many attending the 2016 FCC Ag Outlook tour.

I’ve said before that one of the most important economic drivers of Canadian agriculture this year will be the potential squeeze in profits facing producers.

Last week’s USDA agriculture projections to 2025 validated the projection of softer commodity prices in 2016. Despite a potential price decrease this year, Canada’s producers will remain profitable, at least in part thanks to the loonie. It’ll provide support, albeit to varying degrees, across all sectors:

  • The livestock sector’s profit trends will be steady or decline slightly from their record highs
  • Profit trends in the grains and oilseeds sector will vary by commodity
     

Cattle profits will tighten but remain high

Expect tighter margins for cattle in 2016 - while remembering the sector’s recent years of record profitability. Futures markets suggest feedlot profitability will be challenged in the first half of the year, but will improve as the ratio of feeder-to-fed cattle comes down closer to its historical average. I expect cow-calf operations to remain profitable in 2016, although less so than last year. The dollar will help here.

Hogs to show profits in 2016

Profits in the hog sector should also be positive, especially for operations benefitting from economies of scale or managing operating expenses below the industry average. The recent repeal of COOL and the low loonie will bode well for Canada’s exports to the U.S., also helping lessen the impact of the 2015 U.S. herd expansion.

Profits in canola, wheat, corn and soybeans will differ

Three months ago, grains and oilseeds weren’t looking as good as they are now. Canola, for one, has bounced back due to the positive impact of the dollar. Exports have been strong and tighter stocks have supported prices. Available supply of wheat in the global marketplace is strong, and as such price expectations will be lower in 2016 than in 2015. This should bring margins lower than their historical average.

Conversely, profit margins for corn and soybeans are expected to be lower than their 5-year average. Large global stocks of both commodities and softer corn demand for biofuel production as oil prices continue to flounder will keep U.S. prices lower than their 5-year average. The low Canadian dollar will keep basis levels strong and protect Canadian prices from falling to a level where profits turn negative.

Manage costs to maintain profits

As a strong believer in future markets, I’m going to stick with the message I delivered at the 2016 FCC Ag Outlook tour and my projection of “steady” or “slightly declining” profit margins in 2016. The depressed value of the loonie protects profit margins even if it does raise the price of some farm inputs. Farm management skills remain essential to a successful operation.