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TORONTO and CHICAGO, Sept. 17, 2021 /CNW/ - For the first time in years, North American farmers are grappling with widespread growing challenges, according to a new report from BMO Economics on the agriculture sector in Canada and the United States.

"In both Canada and the United States, exceptionally hot and dry weather across the prairies has curtailed crop yields and is dragging production of major products 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 excess supply, expectations of a smaller harvest have helped provoke a large increase in crop prices. Strengthening demand has also helped."

The report notes that food demand not only held up well through the coronavirus recession, it increased sharply—and grocery volumes have remained high even as the restaurant industry has reopened. "Strong demand, coupled with less abundant supply, has given a major lift to both crop and livestock prices," stated Mr. Goertzen. "That, on its own, is great news for the farm sector."

The report also points out another challenge: costs are rising too, with farmers across the continent facing higher prices for many of their most important inputs, including equipment, fertilizer, feed, and energy. "With costs on the upswing, it is as important as ever for farmers to maintain an unrelenting focus on efficiency," said Mr. Goertzen. "Fortunately, both crop and livestock producers have an impressive track record on that front. Overall, North American wheat production has increased by around 40 per cent over the past half century, even as the amount of acreage devoted to the crop declined by more than 20 per cent. Livestock producers have also made major strides over the long run; in the United States, the average finished steer now weighs almost 350 pounds more at the time of slaughter than it did fifty years ago."

"The situation in the west is a material production challenge and it's affecting producers in almost every sector," said Janine Sekulic, National Director, Agriculture and Agribusiness, Canadian Commercial Banking, BMO Bank of Montreal. "We've been in constant contact with our customers and working with our internal partners to make sure that we're ready to help where we can. There's no one-size-fits-all solution in agriculture and we believe that the key is in understanding the industry and the individual needs of each customer in good times and bad.

"Despite the current challenges, we see huge opportunities in agriculture. We have confidence in the resiliency of our customers. We are as positive as we've ever been on the long-term outlook for this industry," concluded Ms. Sekulic.

"In the United States, crop and livestock farmers are in better shape financially as compared to recent years; however, they face a number of challenges, which include weather uncertainty, increasing costs of fuel, fertilizer, seed, feed, rent and labor, as well as variability in market prices," said Sam Miller, Managing Director and Group Head, Agricultural Banking, BMO Harris Bank.  "Prudent risk management practices remain critical to successfully navigating current and expected market conditions."

Crops

It has been apparent for months that crop yields across the prairies would be subpar this year, but the latest estimates are eye-opening. "In the United States, total wheat yields are likely to be around 12 per cent below trend this year—and that estimate incorporates a decent winter wheat harvest earlier this year," said Mr. Goertzen. "In Canada, which produces predominantly spring wheat, yields are projected to be roughly 33 per cent below trend this year. The drought on the prairies has also devastated yields for Canadian canola—typically the country's largest revenue-generating crop—which are likely to be 37 per cent below trend this year. U.S. canola yields are also extremely weak, though the crop is not grown intensively south of the border."

Although North American corn and soybean yields have held up relatively well this year, reflecting generally accommodative conditions in the U.S. Midwest, continental stockpiles of all major crops are getting extremely low. "Across North America as a whole, inventories of wheat, canola, corn, and soybeans are all projected to fall near decade-lows relative to consumption by the end of the current marketing year," stated Mr. Goertzen.

Livestock

Livestock prices are also benefitting from tighter supply after years of herd expansion. The North American cattle herd actually turned lower before the pandemic, but declined further in 2020 as meatpacker closures undermined farm-level pricing.  This year, the overall headcount of the cattle herd has remained under pressure, as producers in drought-affected regions have been making the difficult decision to cull their herds, driven by the reduced quality of grazing land, the higher cost of purchased feed, and in the hardest hit areas, shortages of drinking water.

"The fact that cattle prices have trended higher despite such culling is a testament to the strength of the demand environment," noted Mr. Goertzen. "Overall, the North American cattle herd is on track to end this year around 2.1 per cent smaller than at the end of 2018."

The hog industry has experienced generally similar dynamics. After a period of rapid expansion, last year's meat processing shutdowns put hog producers decisively into herd reduction mode and significantly reduced the size of the pig crop. This year, higher feed costs are yielding a record rate of slaughter, which is keeping pressure on the herd. Overall, the North American hog herd is on track to end this year around 2.2 per cent smaller than at the end of 2019.

To view the full report, visit: https://economics.bmo.com/en/publications/detail/f88c5aa9-5740-4fb5-b35d-5ff3d2cb1131/

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SOURCE BMO Financial Group