U.S. crop yields soar 14 per cent above trend, but benchmark crop prices fall to lowest level since mid-2000s
Canada composite yields improve while producers benefit from lower loonie
TORONTO, ONTARIO and CHICAGO, ILLINOIS and MILWAUKEE, WISCONSIN--(Marketwired - Dec. 20, 2016) - While North American farmers are in the process of wrapping up a fourth-straight bumper harvest, according to the BMO 2016 North American Agriculture Report, foreign exchange developments have yielded very different experiences for producers in Canada and the United States.
"In the United States, the lofty greenback, which has gained 20 per cent on a trade-weighted basis since the start of 2014, has been yet another bearish factor for crop prices and revenue," said Aaron Goertzen, Senior Economist, BMO Capital Markets. "Canadian producers, in contrast, have benefitted from a drop in the loonie, which is down 17 per cent against the U.S. dollar since the start of 2014 and has provided a like-sized lift to crop prices north of the border."
Mr. Goertzen added that as a result of the weaker loonie, domestic crop prices in Canada are 18 per cent below all-time highs - compared to nearly 30 per cent in the United States - and have risen 5 per cent from their recent low in mid-2014. The lower loonie has been a particularly fortunate development given the country's mediocre crop yields over the past few years.
In Canada, composite crop yields, which consist of corn, soybeans, wheat and canola, picked up modestly on last year's subpar result. However, they remained on-trend overall as a near-record crop of canola on the prairies was offset by a decrease in corn and soybean yields in Ontario.
"Canadian producers have undoubtedly been supported by the weaker loonie," said Adam Vervoort, Head of Agriculture Banking, BMO Financial Group. "This means now, with extra capital available, is an ideal time to invest in technology, which is driving the current string of bumper crops we've seen on a North American scale."
He added, "Those producers who have adopted modern agricultural practices, particularly in the corn space, have grown trend crop yields substantially. There's still room for autonomous, satellite-informed equipment to be refined and used, as the innovation trend shows no sign of slowing down."
Producers in Canada's Western regions, namely Alberta and Saskatchewan, have experienced a more difficult season impacted by weather challenges since October that have delayed their harvest timeline. However, the prairies remain on track for a near-record crop of canola.
Mr. Vervoort affirmed that producers in the West could have potentially seen stronger results weather permitting, but have managed to still sustain a decent crop turnaround. "The harvest conditions have not been ideal, but we continue to work with farmers negatively impacted by adverse weather."
While Canadian producers benefitted from a timely fall in the loonie that lifted crop prices north of the border, it also raised the cost of internationally-priced inputs like energy and fertilizer. Most producers face a wide variety of Canadian dollar-dominated expenses though, so margins have ultimately benefitted on balance.
From mid-2014 to early this year, the weaker Canadian dollar also caused food prices to inflate 4 per cent yearly. Consumers have been somewhat relieved as a result of the partial bounce-back of the dollar in the latter half of the year and a decrease in livestock prices.
Most notably, U.S. crop yields are estimated to have soared 14 per cent above trend this year, reflecting generous growth conditions. Wheat, corn and soybeans recorded their strongest yields to date.
With the United States accounting for large numbers of global soybean and corn production - 35 and 38 per cent respectively - the stateside upswing in production has affected crop markets worldwide.
U.S. crop markets remain under pressure and have not benefitted from the same foreign exchange buffer as Canada. With the exception of fruits and nuts, the Department of Agriculture's aggregate crop price index shows sharp dips from recent highs, especially for grain and oilseeds.
"While growing conditions have been strong this past year, agriculture producers in the U.S. have their share of challenges," said Sam Miller, Managing Director and Head, Agriculture, BMO Harris Bank. "A strong U.S. dollar has hurt export prospects, and falling prices are affecting revenues. It's not all bad news though, as yields were above average in most of the cornbelt, allowing producers to sell more grain. Additionally, livestock producers have benefited from lower feed costs."
Today's crop price landscape poses a challenge for U.S. farmers, but also represents a windfall to downstream buyers. Operating profit margins in the U.S. food processing industry continue to rise, helping to push earnings to an all-time high.
For consumers, prices may have further to fall from the 2.3 per cent drop seen over the past year; soaring processor margins leave plenty of room for price competition. There are early signs in the U.S. - where food spending is on the upswing - that consumers will respond positively to lower food prices, which could provide a firmer floor for crops.
About BMO Financial Group
Established in 1817, BMO Financial Group is a highly diversified financial services provider based in North America. With total assets of $692 billion as of July 31, 2016, and over 45,000 employees, BMO provides a broad range of retail banking, wealth management and investment banking products and services to more than 12 million customers and conducts business through three operating groups: Personal and Commercial Banking, Wealth Management and BMO Capital Markets.
Michelle Agnelo, Toronto
Valerie Doucet, Montreal
Patrick O'Herlihy, Chicago