Challenging Assumptions: Canadian canola producers run the risk of becoming residual rather than preferred suppliers
This is the second part of a series that started last week looking at the assumptions on which Canadian agricultural trade is based and whether those assumptions are justified.
When North American farmers look beyond the present trade tensions with China and see glowing prospects of profitable decades to come, Todd Hubbs pauses.
“I worry about it a lot,” he said in an interview.
“I worry about soybeans becoming wheat. If soybeans become wheat, so does canola.”
Hubbs is a University of Illinois professor whose job it is to provide agriculture market analysis, which usually occupies him with looking out only months or a few years into the future.
But he often worries about the comforting assumptions held by so many farmers about a future, decades away, with a rising world population that is getting richer and demanding more and more food, while the world runs low on land and water. North America, many believe, is one of the handful of places that can increase crop and livestock production to feed this ever-larger hunger.
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Hubbs looks at the past and sees similar predictions failing to pan out, as world agricultural production has soared to meet new demands since the 1970s.
“All you have to do is look at population growth in the last 40 years and at commodity prices,” said Hubbs.
“Population has grown greatly and commodity prices have not, and we haven’t got a shortage of anything.”
Hubbs sees wheat as a harbinger of what happens when a region’s farmers go from being preferred suppliers to becoming residual suppliers — only able to sell crops or livestock when their prices are low or other supplies are disrupted. That’s the general situation of American wheat today.
“Wheat acreages have gone down dramatically (since United States subsidy programs stopped pushing farmers to grow specific crops in the late 1990s),” he said.
“When you are the residual supplier in the world market, this is what you get.”
Western Canadian farmers often refer to wheat as a “rotation crop,” something grown in between other crops that offer better chances at profitability. In the U.S., most farmers feel the same way, and vote with their acreage.
Corn and soybeans have been profitability heroes for U.S. farmers in recent years, as canola has been in Canada, but Hubbs thinks there are reasons to question their future.
Corn’s profitability for U.S. farmers was greatly influenced by biofuel policies pushing much of the crop into ethanol production. That demand shock has ended.
Soybeans’ value soared with the demand shock of a rising Chinese economy sucking in more and more offshore crop. But China’s growth has since dramatically slowed.
However, those increases in demand since the early 2000s have also spurred agricultural development around the world, and much of that development is only beginning to yield fruit now. For example, South American crop production has dramatically surged and “it doesn’t feel like they’re done yet.”
How about countries like Kazakhstan or Ukraine?
“I don’t think they’re anywhere near the potential they could be in the long run if they get their act together,” Hubbs said.
Also, the assumption that countries like China, other parts of Southeast Asia, India and Africa can’t greatly increase crop production doesn’t match the history elsewhere. When populations urbanize and get wealthier, farming regions tend to move from small, inefficient farms to large, efficient, highly productive operations like those in North America.
“The idea that we’re the only ones that are going to produce food drives this mantra (of a food-scarce world needing North American crops),” said Hubbs.
“This is not true.”
Instead of the decades ahead offering a repeat of the 2006-13 bull market, the opposite could occur, he said.
“Are we going to see, in the next 20 years, another demand shock? Do we have a world where there is plenty of product to meet needs?”
That doesn’t mean North American farmers can’t remain sustainable or earn profits, Hubbs points out. Efficient farmers who can produce crops at globally competitive prices will have valuable commodities to sell.
But the assumption that easy times are just around the corner seems questionable on many grounds.
“I don’t think it’s going to be a disaster for the agriculture sector, but I don’t think it’ll be the Hallelujah Chorus many think it will be,” said Hubbs.