July outlook for Canadian crops remains positive despite uncertainty
FCC Ag Economics is doing a mid-year check-in on our January 2018 Outlooks. Throughout July, we’ll update our expectations about profitability in six Canadian ag sectors (crops East and West, hogs, cattle, dairy and food processing). We’ll describe what’s happened in 2018-to-date and what we think you should monitor in the next six months.
As the 2017-18 marketing year (MY) winds down, our January forecast holds fast for several Canadian crops. Corn production should remain profitable in 2018. Canola too will see positive margins till the end of the year, although they’ll be more pressured than they were in the first half. We still expect red lentil margins to be negative. Green peas should begin to see some upside, becoming slightly profitable for the remainder of the year. Wheat won’t likely be profitable despite some recent upside in pricing and global uncertainty has helped drop the soybean price to levels that, if sustained, likely mean breakeven profitability or slightly better.
The US$0.78 loonie helped boost Canadian revenues during the first six months, offsetting increases to interest rates, and fuel and fertilizer prices.
Global corn production in 2018 is forecast up from a year ago, helping to meet global demand which is expected to grow 2% by the end of the 2018-19 marketing year. Despite those production increases, world ending stocks are expected to shrink 38 million metric tons in that time which, if realized, would be the lowest stocks on record since 2012-13.
With fewer acres seeded to corn and lower yields expected, U.S. year-over-year corn production is forecast down in 2018. Both exports and domestic use should also be reduced throughout 2018-19 except for corn used for ethanol, reflecting expected gasoline consumption growth. With supply slowing more than demand, the 2018-19 U.S. ending stocks are forecast down 525 million bushels from last year.
Although the 2017-18 corn price received (US$3.25) hasn’t changed since January, corn futures prices for the 2018 crop had risen until the end of May because of those expected low stocks levels. The USDA projects the U.S. 2018-19 farm price to average US$3.80, up US$0.50 from the 2017-18 average. But the December 2018 corn price is under pressure with a higher-than-expected U.S. 2018 supply. Assuming this translates into a proportional pressure on Canadian corn prices, the 2% annual increase in Canadian corn acres planted in 2018 may not be large enough to raise corn revenues.
We also expect lower ending stocks for U.S. soybeans in the 2018-19 marketing year. The record U.S. 2017 crop will likely decline this year with an expected drop in acres. While solid domestic demand and a sustained strong pace of imports is expected to lower global ending stocks for 2018-19, overall soy imports and prices are now uncertain, given China’s escalating trade tensions with the U.S.
That’s not necessarily a slam-dunk win for Canada. Chinese buyers faced with paying U.S. tariffs may buy more Canadian soybeans, but that positive impact might be more than offset by negative consequences. Given China’s capacity to determine the world price – they import close to 2/3 of the world’s soy imports – they can shift global trade flows between and among the world’s major traders in ways that might disadvantage Canada, and ultimately lower the U.S. reference price.
Uncertainty will, at the very least, introduce price volatility and an ambiguous U.S. farm price (US$8.75-$11.25 per bushel compared to US$9.35 per bushel in 2017-18). Despite the potential for risk, we expect the sector to weather the storm. Canada’s total area seeded to soybeans is projected to have sharply decreased in 2018 after rising to a record-high 7.3 million acres in 2017.
With global oilseed production projected to rise in 2018-19 year-over-year, global exports should also increase, although soybeans (as of June) are expected to account for most of the increase. The added production will be used in a higher crush during the next MY, leading to lower ending stocks compared to 2017-18. Total U.S. oilseed production for 2018-19 is forecast to decrease from 2017-18, although canola production forecasts are higher.
Canola prices dropped more than expected in the first half of the year, in tandem with soy’s drop. The decline in canola was more muted however, leading to our forecast of an average price of CA$11.30 per bushel for the rest of the year. Statistics Canada estimates that Canadian producers seeded a record-high 22.8 million acres of canola in 2017, and will be planting just 1% fewer acres in 2018. This decline would lower the stocks-to-use ratio and likely support canola prices.
India’s tariffs on Canadian peas and lentils led to projected year-over-year declines in acres seeded: 12% for dry peas and 14.5% for lentils. Even with the expected decline in production, ending stocks should increase compared to the 2017-18 MY due to the slow pace of Canadian exports. Red lentils are projected to average CA$9.80 and green peas, CA$8.90 for the year.
U.S. wheat production is projected to rebound in 2018 and increase 5%, yet U.S. ending stocks for 2018-19 are forecast to hit a 4-year low. Global ending stocks should also marginally decline this year, thanks to continued strength of demand and Russian production reverting back to normal levels after the large 2017 crop.
As a result, the average 2018-19 price is expected to slowly rise above the 2014-15 price for the first time. Statistics Canada expects Canadian farmers to have increased the area sown to wheat by 10.4% in 2018, given it might offer a better price and more profitable options than pulse markets. Spring wheat margins are projected to be slightly negative, on average, for the rest of the year, but efficient operations should be able to achieve positive margins.
Global market forces played a big part in Canadian competitiveness and the profitability of our agricultural sectors in 2018-to-date. Several macro factors did too – and while we didn’t get everything right, our forecasts in January help explain those trends.
Interest rates slowly trend up while the loonie hovers at US$0.78
Our January forecast of a US$0.78 loonie was right on the money up to mid-June (see illustration). But the Canadian economy relies on the strength of export sectors. Trade tensions, currently pushing the CAD lower, could continue to pressure the loonie below the $0.78 projected 2018 average.
In January, FCC Ag Economics forecasted 2018...
Sources: Bank of Canada, Bloomberg
However, we underestimated the strength of the world economy and the resulting robustness in global oil demand: despite rising oil production in the U.S., the West Texas Intermediate (WTI) crude oil price averaged close to US$65, significantly more than our initial projection of US$55.
The Bank of Canada has revised their projections of Canadian economic growth for 2018 since our January outlook. The Bank expects a slower rate of growth, but that the economy will operate close to full capacity this year. Inflationary pressures persist, trending modestly higher than our forecast of 2.0%, the Bank’s mid-point target.
We also correctly anticipated the higher short-term rates in the U.S. and Canada that pushed bond yields higher. The average 5-year fixed rate on mortgages has climbed 35 basis points in the first six months of 2018, in line with our forecast of an annual increase of around 75 basis points.
After a hike to the overnight rate in January (of 25 bps), financial markets suggest there’ll be another rate hike in July, consistent with our expectation of at least two rate hikes and a bump of 50 – 75 basis points in 2018.
On the radar
- The loonie’s waning capacity to gain value in the last six months of the year. A lower loonie can help offset downward pressure on commodity prices. That may be especially timely this year, as the US/China trade conflict brings uncertainty and lower prices.
- Further interest rate increases in 2018 (unlikely until the last quarter of 2018, if at all)
- An uncertain global trade environment to close out 2018
- North American Free Trade Agreement (NAFTA) discussions will continue (with no determined end date)
- Full ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) agreement is ongoing
- The full implementation of the Comprehensive Economic and Trade Agreement (CETA) is conditional on ratification by the EU member states
- 2018 yields for U.S. wheat, corn and soybeans
- Brazilian seeded acres of soybeans and corn in response to price volatility and trade disruptions
- Fertilizer and fuel prices, which are expected to stabilize after tightening agriculture margins when they rose 5.4% (on average) and 14%, respectively, in the first five months of 2018
- Strength in Canadian farm income in the latter half of the year. That strength will go a long way in determining the growth of Canadian farmland values, which are expected to appreciate moderately in 2018. They grew 8.4% in 2017, outpacing farm revenue growth, but volatile crop prices and higher rates are likely to moderate future increases in land values.
Martha is a Research Specialist with a focus on economic performance and success factors for agricultural producers and agri-businesses. Martha has 20 years’ experience conducting and communicating quantitative and qualitative research results to a number of different audiences. She holds a Master of Sociology degree from Queen’s University in Kingston, Ontario.
In this series
The robust food demand and limited cost inflation supporting profitability in Canada’s food processing since January should continue to year-end.
Milk consumption trends support growth in dairy revenues while producers’ margins continue to be pressured.
Strength of demand for Canadian red meats will sustain profitability as 2018 winds down, with both supply and production likely to expand in the second half of the year.