Current crop prices vs long-term outlook: like a spell of cold weather in a warming climate
Two back-to-back seasons of high crop yields in 2013 and 2014 increased world stockpiles of several important commodities – particularly corn and soy. Harvests in 2015 were uneven in different parts of the world, but were sufficient to maintain relatively high global stock levels. As a result, corn and soy prices have not rebounded to the highs of 2012. Is this a new norm? Not likely.
As we have pointed out in previous research, the 2013-2014 worldwide bumper crops were the first such back-to-back occurrence since 1991 – 1992; a once-in-a-generation event. And while current corn stockpiles are roughly in line with those experienced in the late 1980’s, worldwide consumption has more than doubled since that period, so on the more important measure of stocks-to-use, worldwide supplies are still at the levels of the early 2000’s and remain susceptible to supply disruptions (source USDA data).
It is also important to keep in mind that the weakening Canadian dollar has helped to insulate Canadian growers from declining world market prices that are quoted in US dollars. As we pointed out in our previous blog post, as at the end of Q3, corn prices were off only 8% in Canadian dollar terms since May 2014 (versus 24% in USD), wheat was off 11% (versus 26% in USD) and Canola was actually up 23% (versus 2% in USD). Canadian dollar price swings of these magnitudes are considered fairly standard intra-season volatility. The only major crop to experience a significant decline in Canadian dollar terms was soy (off 28% in CDN vs 40% in USD).
It is also important to recognize that corn and soy prices impact only a portion of the Canadian farm sector’s overall profitability. Prices for pork, dairy, vegetables and specialty crops all remain very strong and beef prices are at all time highs. So the net impact of lower corn and soy prices on Canadian farm financials is expected to be modest. FCC is predicting robust farm profits again this year only slightly below the records set in 2013 and 2014.
The current crop price outlook is analogous to the the difference between local weather conditions and a warming climate. Weather conditions are becoming more volatile – with extremes of both heat and cold – but our climate is inextricably warming with serious implications for agriculture worldwide. So too, future crop prices will be volatile – both up and down – around a steadily increasing trend driven by climate change, water shortages, changing diets and population growth.
So we view current grain prices as a temporary fluctuation around a steadily increasing long-term trend.