Consumption will drive opportunity

Long-term forecast | Cargill president says higher price plateau will still have volatility

High prices and volatility will remain the new norm for farmers, says the president of Cargill Canada.

That brings big opportunities and big risks.

“We are one production shock away from another volatile price move,” Len Penner said in a speech at the Manitoba Swine Symposium.

“We are in a different environment going forward on where prices will be at.”

Penner sketched out a long-term picture for prairie agriculture, with coming years likely dominated by the difficulty of production keeping up with surging demand.

He said agricultural commodities have been in a profoundly different environment since 2005, when a 30-year trend of annual one to two percent per year growth in food commodity demand was replaced by a higher two to three percent increase.

That has put great pressure on the world’s ability to increase production, something proven by 2012’s grain market rally provoked by weather problems in the U.S. Midwest and Eastern Europe.

Penner said Northern Hemisphere crop production fell by 120 million tonnes in 2012, which was 40 million tonnes lower than needed to meet consumption. Stockpiles were drawn low and prices surged as a result.

Prices have settled down since the historic 2012 rally, but Penner thinks the likelihood remains that this could happen again. Global food consumption continues to rise, so stockpiles are not going to grow quickly.

Penner said he expects to see world crop trade increase by 100 to 150 million tonnes in the next four years, which will require farmers to produce all they can.

“That’s the opportunity that we have from a global perspective, from a Canadian view,” said Penner.

“Production continues to scramble to stay ahead of the consumption growth.”

Grain prices have fallen from the peaks, and Penner doesn’t expect them to regain those heights without a major production problem. However, he said it is unlikely they will fall back into the 1972-2005 range.

“Will we go back to three or four dollar wheat, or two or three dollar corn? (That is) unlikely, given the tightness,” said Penner.

That’s generally a good situation for crop farmers, but it’s a great risk for livestock producers.

Hog farmers’ profitability in particular was ravaged by the feedgrain price surge of 2012 and further spikes could have similarly grave implications.

Penner said unpredictable and severe price moves are also part of the post-2005 reality.

“Because of the tightness, we are into a volatile market,” he said.

“The environment that we’re in is that we can expect some high volatility.”

For farmers, the risk lies precisely in the sort of volatility that occurred in 2012, where expectations of stable or weakening prices are suddenly replaced by a dramatic reversal.

“Volatility is unexpected. You don’t know when it is going to happen,” said Penner.

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