A silver lining after a rough summer?

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A new report from BMO Economics sheds light on the economic impacts of the hot and dry conditions that have persisted in North America this summer.

The report, released on September 17, describes how the growing and widespread challenges facing North American farmers this summer have affected an agricultural sector still trying to understand the impacts of COVID.

“In Canada and the United States, unusually hot and dry weather on the Prairies has reduced crop yields and pushed production of major commodities like wheat and canola to multi-year lows,” said Aaron Goertzen , Senior Economist, BMO Capital Markets. “But there is a silver lining: after years of oversupply, expectations of a weaker crop have helped push crop prices up sharply. Strengthening demand has also helped.

This silver lining is in part due to the fact that demand has remained surprisingly high throughout the pandemic, even when supply was plentiful. The report notes that crop prices were mostly unaffected by the pandemic, but those prices were already low due to several years of heavy harvests and falling exports in the face of the China-US trade war.

“Fortunately for the producers, all of that has changed,” the report reads. “With declining production and stocks, trade challenges largely resolved, and domestic demand in good shape, prices for wheat, corn and soybeans have all hit eight to ten year highs this year, while the canola hit an all-time high. “

Livestock prices have held up just as well. The situation at the start of the pandemic, when the closure of meat packing plants created an overabundance of animals on farms, was short-lived. “With the processing capacity back online and strong consumer demand, benchmark livestock prices hit a five-year high this summer after falling to a 10-year low last spring. In the pork sector, prices have fallen from a 17-year low last year to a seven-year high this summer, ”the report notes. These high numbers have tamed a bit but remain above recent standards.

But in Goertzen’s silver lining is still the black cloud of this hot, dry summer. Wheat yields are expected to be 33% lower this year in Canada. Canola yields are forecast to decline 37 percent. And many breeders have had to slaughter their herds for lack of suitable pasture. So even though high prices are attractive, they do not help the farmer who has no product to sell.

Craig Klemmer, senior economist at Farm Credit Canada (FCC), says his organization is also seeing the trends noted in the BMO report.

“I think we’re going to have some nutty soup when it comes to this industry,” Klemmer said. “If you face a stuck low price and now have to buy high priced grain to fulfill that contract, it’s going to create a real drain on cash flow. “

On the other hand, this scenario is not taken for granted. Many producers are well positioned to take advantage of the higher prices and have mitigated their exposure to risk through crop insurance and / or enrolling in the AgriStability program. Klemmer suggests that these factors should help many farmers overcome this problem.

Yet the drought was widespread and hit Western Canada particularly hard.

“We’re sitting in a pretty tough situation here and I don’t think we can deny it,” Klemmer warned.

“We know production is going to be down. We’re going to have to be innovative to get things done and hopefully we get a good recovery. So we will have to see at the end of the day how it goes. “

Klemmer expects a clearer picture to emerge in the coming months.

“Once all the crops are in the bin, we’ll have a much better idea of ​​what the production looked like,” Klemmer said. “And on top of that, we have to figure out what the quality will look like.”

The numbers will start pouring in at the end of this year and early next year. But Klemmer notes that the first half of this year still skews the data somewhat and has to make its way through the system.

“The prices were good. People were still shifting last year’s crop and these don’t always show up in all the numbers, ”he said.

The position of input prices relative to commodity prices is also uncertain at the moment, but will become clearer in the coming months.


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