I attended the annual conference of the (AAEA), held last week in Boston. Conferences of this type are always tainted by the flavor du jour. Hence, no surprise that conversations were dominated by the current downturn in U.S. agriculture.
My takeaways for Canadian agriculture
1. Next 12 months spell tighter margins across most sectors
Corn: While demand is slightly growing, the potential for a record U.S. crop coupled with larger world production mean U.S. corn prices will trend lower than they are now.
Wheat: A large wheat supply means that a price rebound rests on future export demand strength. Mixed opinions on whether this is likely to occur.
Soybeans: Anticipating South American production is difficult: 1. Reforms at the end of 2015 in Argentina may reverse a long-term decline in seeded grain areas at the expense of soybeans; 2. Producers in Brazil face cash flow constraints that can limit their production potential. Hence, stocks are expected to tighten next year, supporting prices at very decent levels. Soybeans may be the only exception to tightening margins.
Cattle: Signs that U.S. herd expansion is slowing (e.g. higher heifer slaughters in June). Projections of 4% growth in U.S. beef production, with an additional increase in 2017.
Hogs: Immediate future may be challenging for U.S. hog producers as projections call for break-even, or slightly worse, returns.
Dairy: Supply continues to grow in the U.S., with a potentially small increase in the price of milk coming in 2017. Skim milk powder prices are expected to remain low.
2. Global food demand is growing. So what?
We know the story: Population growth and rising incomes (mostly in the developing world) mean agricultural output needs to grow to meet increasing food consumption.
The most relevant issue for producers: What will the future trajectory of prices be? To answer this question, one must compare projections about the pace of growth in production versus demand. If demand grows faster, prices are bound to climb in order to trigger more resources (land, labour, etc.) into agricultural production.
A argued that the pace of increase in crop productivity is where the uncertainty about future prices comes from. And the most likely scenario is that, despite global crop production projected to nearly double over the next 50 years, prices are roughly going to be equal in 2050 to what they are now (after adjusting for inflation).
A similar story can be described for livestock prices, with the caveat that there is even more uncertainty with regards to long-term prices.
So what does this mean?
In the long-run, it looks hazardous to build long-term business plans on the notion that agricultural prices will climb. The level where prices are now is probably a reasonable reference point to project future pricing trends. In the short-term, the lower Canadian dollar will continue to buffer some of the lower price pressures recorded in the U.S., supporting margins of Canadian producers.