2019 in review – Part 2: A test of industry resilience
Trade tensions, livestock disease and financial disturbances defined the first six months of 2019, with spring seeding weather disruptions quickly becoming the top issue. We’ll leave spring and continue our review of the last half of the year.
The USDA’s July World Agriculture Supply and Demand Estimates (WASDE) for U.S. seeded corn acres were initially deemed unlikely because of late and prevented plantings caused by extensive flooding in the U.S. Midwest. Despite these setbacks, corn futures prices declined from slightly above USD4.00 in late May to around USD3.30 by mid-July as markets rallied around the idea that higher corn production was possible. Conversely, soybeans prices rose from USD7.90 in late May to USD9.10 by mid-July.
Bond rates across the globe moved into negative territory on a string of bad economic data: one-quarter of the global bond market was trading at negative yields. Central banks in Brazil, Australia, New Zealand, India and other parts of the world proceeded to cut their policy interest rates.
Lower interest rates can bring down currency value. This increased the prospects of a currency war developing alongside ongoing trade tensions, as the U.S. administration viewed the U.S. dollar as overvalued.
The FCC mid-year review of the farmland market suggested that operations exercised caution when purchasing land, and instead focused on improving productivity and controlling costs. With challenging weather conditions and lower commodity prices expected to weaken revenues, risk management is an essential business strategy.
If the 3% increase for the first six months of 2019 holds steady for the remainder of the year, it will join the five-year trend of softening growth in average farmland values.
The U.S. postponed planned tariff increases on Chinese exports, and China reciprocated by suspending taxes on imports of U.S. pork and soybeans. With tensions diminishing, both countries reached a preliminary and tentative trade agreement.
This “Phase one” agreement was finalized last week. The U.S. will suspend some tariffs and lower others in exchange for China to spend USD32 billion more over the next two years on importing U.S. agricultural products; an annual increase of 50% relative to what they imported in 2017. This large commitment to purchase U.S. ag and food products is bound to lift U.S. ag commodity prices and shift trade patterns in 2020.
Weaker crop prices mostly drove the lower estimates of farm cash receipts for the first nine months of 2019. Assuming a 3% increase in operating expenses from 2018 generates projections for net cash income (NCI). Saskatchewan and Manitoba’s NCI are projected to decline 17% (Table 1). Other provinces are expected to record a rebound, but this follows a decline in the 2018 NCI numbers.
|Farm cash receipts
|Net cash income
|Farm cash receipts
|Net cash income
Source: Statistics Canada, calculations by FCC
The projections in Table 1 do not account for the 2019 harvest challenges. Saskatchewan’s final 2019 crop report estimated 93% combined acres, and it’s unsure how much of the crop will be left out in the field until the spring.
Statistics Canada estimates that yields for barley, spring wheat, durum, canola and lentils will be on average higher than last year. Corn and soybean yields will be down. Quality will generally be below average, discounting crop receipts for the fourth quarter of 2019 and throughout 2020. Wet harvest weather will increase drying expenses in general.
Market access and weather challenged the industry’s resiliency. But within the marketplace turmoil, a strong demand for ag commodities and food remains a positive driver.
The global marketplace is very competitive; other large food and agricultural suppliers are working hard to grow production and market share. Canadian agricultural and food production can stand out with its ability to supply safe, nutritious and high-quality food at an affordable price point.
Check back early in the new year when we explore the top trends to watch in 2020.
Vice-President and Chief Economist
Jean-Philippe (J.P.) Gervais is the Vice-President and Chief Economist at FCC. His insights help guide strategy and monitor risk throughout the corporation. In addition to acting as an FCC spokesperson on economic matters, J.P. provides commentary on the agri-food industry through videos and the FCC Economics blog.
Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He’s also a past president of the Canadian Agricultural Economics Society (CAES). J.P. earned his Ph.D. in economics from Iowa State University in 1999.