Canadian and U.S. agriculture: Why the different outlooks matter to you

The U.S. Department of Agriculture (USDA) reported some struggles to support U.S. producers affected by one of the worst agricultural downturns in more than a decade. Yet, the outlook remains positive for Canadian producers: Farm cash receipts are projected to remain relatively flat in 2016 and Canadian agriculture shows a strong balance sheet.   

Given the high degree of integration between U.S. and Canadian agricultural markets, why the difference? And, does this suggest risk for Canadian producers?

The low CAD/USD helps Canada, hurts the U.S.

The CAD/USD exchange rate is currently 19% below the five-year average. The depreciation instantly bumps the prices Canadian producers receive for many commodities priced in the U.S. market, which are then converted at a more favourable exchange rate.

A stronger USD is also usually associated with weaker commodity prices: the stronger USD lowers the purchasing power of buyers in international markets and leads to a decline in demand. Yet the demand for some commodities remained surprisingly resilient over the last 12 months: corn prices have held steady and soybeans prices even moved higher. When U.S. prices fall (e.g. cattle, wheat), the lower Canadian dollar offers some protection.    

Weather plays a role

Weather has uniquely threatened U.S. ag. Dry conditions hurt part of the Prairies’ production in 2015 but Canadian ag production has otherwise been consistent; and in some years, it far exceeded recent annual targets. But in the U.S., five years of severe drought have affected California’s agricultural production and lowered producers’ revenues.

In 2015, California dairy and livestock drought-related losses amounted to an estimated US$350 million (or 2.8% of revenues). These losses have been compounded by global market conditions. Starting just prior to 2015, world dairy prices have declined more than 30%. This has hit the U.S., the world’s largest single-country dairy exporter, much harder than Canadian producers.

Canada seems to have picked up some of the opportunities: Canadian exports of edible vegetables grew between 2006 and 2012 at an average annual rate of 7.3%, but between 2012 and 2015, exports increased at an average annual rate of 25.9%.

Canadian export revenues poised for greater success

At the same time, international demand is growing for crops with a decided Canadian advantage. Canada is the world’s largest exporter of legumes and canola seed, and in 2015, Canada overtook the U.S. as the world’s largest wheat exporter, thanks in part to the CAD/USD difference. Pulse exports alone are currently red hot.

Input costs? Advantage, Canada

Just like a lower Canadian dollar raises the prices received by producers, it also can work to raise the price of farm inputs they purchased. But not all inputs used on Canadian farms are priced in U.S. dollars. Statistics Canada reported that farm input prices declined by 2.1% in the first quarter of 2016. In comparison, farm input prices increased 0.8% on average in the U.S. over the same period.  

What’s in it for you?

The outlook for Canadian agriculture remains positive relative to the current market conditions in the U.S. But there are obviously no certainties when it comes to the future path of the CAD, or weather related events. Sound risk management strategies are the key to navigate what could be a volatile economic environment in the next few months.