The potential for increased volatility because of unpredictable factors is a particular concern for Farm Credit Canada
It is going to be another tight year for profits in grain farming, according to Canada’s largest agricultural lender.
“Prices will continue to be pressured by abundant global supplies,” Farm Credit Canada said in a recently released 2020 outlook for the country’s grains, oilseeds and pulses sectors.
Some commodity prices will be above their five-year average and others below, but in general the forecast calls for more of the same.
“There is some profitability on the horizon for 2020 but it’s going to be tight,” said FCC chief agricultural economist J.P. Gervais.
What concerns him is the potential for increased volatility because of unpredictable factors such as trade wars, African swine fever and rising protectionism.
“I’m cautious because of some of the risks out there, but I’m positive because of the strength in demand for commodities,” he said.
A new curveball is coronavirus, which has infected commodity markets.
“I’m actually a little surprised, frankly, that it has affected the market the way it has,” said Gervais.
The market wild cards are not necessarily all negative. There could be a faster-than-expected rebound of China’s hog herd, the recent U.S.-China trade pact could result in higher North American prices and the United States may decide to boost ethanol demand.
“In short, the uncertain environment of 2019 will carry into 2020,” said FCC in the report.
Gervais’s advice to growers is to know their break-even levels and capitalize on opportunities to lock in profits.
Canola is the biggest money-generating crop grown on the Prairies. FCC expects average prices to remain in line with the long-term average at about $465 per tonne despite a higher-than-average stocks-to-use ratio for the crop.
The stocks-to-use ratio is expected to climb to 18.1 percent in 2019-20, up from the previous five-year average of 13.4 percent.
However, Gervais said canola prices have been on the rise of late, ending 2019 at the same level they started the year.
He said strong global vegetable oil demand because of rising biodiesel mandates in some countries has elevated canola prices.
FCC believes that if China buys half as much Canadian canola in 2020 as it used to buy before the Huawei dispute, it would drive the stocks-to-use ratio down to 13 percent and increase farmgate prices to the $500 to $550 per tonne range.
China bought about 37 percent of its normal Canadian canola volume through the first 11 months of 2019, with exports noticeably climbing in October and November.
FCC believes crop input prices will trend slightly higher in 2020 because of an anticipated five to seven percent increase in fertilizer prices before spring planting begins.
The increase in fertilizer prices is anticipated because of the lack of fall fertilizer placement in North America due to the delayed harvest. That is expected to generate pent-up demand for the product.
Gervais believes growers are going to keep a close eye on expenses in 2020 coming off two years of tight margins.
The loonie gained strength in 2019, ending the year at US$0.77 after starting the year at $0.74. FCC expects it to fall back to $0.75 in 2020, which is good for crop receipts but bad for crop input expenses.
FCC expects the Bank of Canada to make one cut to interest rates in 2020 to support the Canadian economy, which is good news for farmers carrying debt.