Top Economic Drivers of 2017: Commodity Prices
The beginning of a new year marks a time of planning. The FCC Ag Economics team wants to help you put your best foot forward into 2017 with an in-depth look at the top five economic drivers affecting Canadian agriculture this year. Check out the first post in this series and stay tuned over the following weeks as we dive into each driver in more detail.
Canada’s entire agri-food supply chain should be profitable in 2017, driven by a Canadian dollar around US$0.75. U.S. economic growth will raise the value of the USD against global currencies, keep Canadian exports competitive in global markets and potentially weaken commodities priced in U.S. dollars. Commodity prices Canadian producers received in 2016 were lower than their 5-year average and they will continue to pressure many operations and businesses across the Canadian agri-food supply chain in 2017. Given increasing global production and inventories of most ag commodities, commodity prices is our third trend to watch in the coming year.
What can Canadian ag expect from commodity prices in 2017?
Penciling out crop mix plans may be nerve-racking for producers in 2017; large global stocks suggest grain and oilseed prices won’t improve much in 2017. Global stocks-to-use ratios show more coarse grains will be available for use than oilseeds, maintaining the price of oilseeds relative to grains higher for the first half of 2017.
Tightened Canadian canola stocks in 2017 relative to 2016 levels and their recent five-year average will support canola profitability. The same can’t be said for wheat markets hampered by growing stocks-to use ratios and the 2016 crop’s quality issues that pushed it into the lower-priced feed grains.
As North American livestock supplies continue to increase in 2017, prices are expected to remain soft through the first half of 2017. Cow-calf operators’ profit margins may tighten at the same time as feedlot profitability improves. Overall, the beef sector’s outlook is generally positive given a Canadian dollar below its five-year average.
The rebuilding of the Chinese hog herd is expected to pressure North American hog prices as demand out of China could slow down off the high 2016 levels. The good news is healthy supplies of grain, much of it low quality, mean healthy supplies of feed grains available in 2017. That will improve 2017’s hog sector profitability. Expansion in U.S. processing capacity should trigger more competition among buyers of live hogs, and thus reflect in the price producers get. Overall the hog-to-corn price ratio projects to be favourable to producers.
As usual, production increases must be met with strong demand. All signs point to continued strength in food demand abroad, which should support Canadian prices. And lower farm prices combined with strong competitive pressure at the retail level should cause meat retail prices to moderate over time, perhaps encouraging more consumption domestically.
What’s the bottom line?
The 2017 outlook for commodity prices is all about increasing global production. Growing production will pressure prices which means profit margins may be tighter. A Canadian dollar around US$0.75 dollar should keep livestock and crop operations profitable in 2017.