Low Crop Prices to Weigh on North American Farmers’ Bottom Lines-BMO Economics
TORONTO, ONTARIO and CHICAGO, ILLINOIS
North American farmers are facing the lowest crop prices in years as a record harvest drives up supply – especially for corn and soybeans, the continent’s top crops – according to a report from BMO Economics released to coincide with the Fall harvest.
Despite the challenging environment, most farmers should weather the downturn in relatively strong form, as it comes after several years of near-record farm earnings. Soaring hog and cattle prices will also allow diversified operators to offset lower crop revenue with higher livestock earnings, noted Aaron Goertzen, Economist, BMO Capital Markets.
In the report, Mr. Goertzen also points to large crop stockpiles, muted global export demand and limited rail capacity as key factors that will likely continue to depress prices for leading crops into 2015.
Furthermore, overall crop production is not expected to drop much next year because the high cost of land and machinery will drive most producers to forge ahead with planting even though market conditions are weak. Mr. Goertzen notes that crop prices could begin to recover once the size of next year’s crop can be gauged.
“After an atrocious growing season in 2012, North American farmers are now in the process of cultivating a second straight bumper crop,” Mr. Goertzen said. “Yields on corn and soybeans, the continent’s two largest crops, approached all-time highs in 2013 and look to have blown the previous records out of the water this year,” he said.
Crop prices in North America were flirting with all-time highs just two years ago, spurred by several years of lacklustre growing conditions and the worst U.S. drought in 25 years. Crop prices have declined sharply since then, with corn and soybean prices down 34 per cent and 25 per cent year-over-year respectively.
Prices for corn and soybeans fell sharply amid rising output, with corn production up 3 per cent in North America this year, and 10 per cent over the previous record in 2010. Soybean production in North America is up 17 per cent over last year.
Crop sizes will likely remain high next year as well because farmers will have few alternatives to reallocate acreage in an environment where prices for most key crops, including wheat and canola, are low.
“Crop prices are unlikely to rebound with gusto any time soon, and scarce rail capacity will also exacerbate the supply overhang, particularly in U.S. states where oil producers compete against farmers for space on the tracks,” said Mr. Goertzen. He noted that a more moderate harvest in Canada will make transportation less problematic north of the border this year.
“Our clients have experienced a big improvement in growing conditions since the lingering effects of the drought in 2012 and delayed planting last year have worn off,” said Sam Miller, Managing Director and Head, Agriculture, BMO Harris Bank. “The result of this year’s vast crop, however, is that prices have trended downward for much of 2014. As we look ahead to 2015, margins will be squeezed with prices declining at a greater rate than costs of production. Supply and demand in grains will eventually come back into balance if there is a reduced overall supply, continued increase in global demand, and weather that would keep excess yield in check.”
The U.S. Department of Agriculture estimates that total U.S. crop revenue will decline around 7 per cent this year, or some $15 billion. BMO Economics notes that Canada will likely be hit even harder, with crop revenue estimated to be down 9 per cent for the year. The USDA expects corn, wheat and canola will all be exported in lower quantities from North America this year.
The good news is that most farmers should be relatively well equipped to handle the dip, even if it lasts a while. Since farm incomes are backing away from near-record highs, most producers should be able to weather temporarily lower profitability.
“Fluctuations in crop yields, production and prices are nothing new,” said Andrew Bowman, National Director, Agriculture, BMO Bank of Montreal. “But as a group, farmers are highly proficient risk managers and, as such, we remain confidence in their ability to manage through fluctuating crop prices.”
The full report can be downloaded at www.bmocm.com/economics.