Volatility expected as most prices remain high

Chinese unpredictability, exchange rate uncertainty and rising fertilizer prices could offset optimistic market climate

Canadian farmers are looking at a year of good demand and tight stocks, factors which should keep returns healthy, Farm Credit Canada thinks.

However, both the China factor and currency exchange rates are likely to play a big role in how things actually work out.

As well, robust demand for crop inputs mean rising input prices will crimp returns.

Underlying everything is a twitchy market whose moves will be unpredictable.

“Volatility may spike throughout 2021,” said FCC economics editor Martha Roberts in a Feb. 10 report.

FCC is expecting canola acres to increase in 2021, likely stealing some from wheat. While wheat has been carried along by the corn-soybean rally but is not low on stocks, canola’s rally is justified on its own fundamentals.

“With a five-year average stocks-to-use ratio of 14 percent and a 2019-20 average of 15 percent, Canada’s ratio is expected to fall to six percent in 2021, a record low,” says the report.

“With that support, we project seeded acres to grow year-on-year and production to increase with expected trend yields.”

However, FCC projects that pea prices will weaken once the 2021 crop comes in because stocks are relatively high. Combined with weak export demand, that’s a negative factor.

“India’s tariffs will continue to limit exports, as will lower demand elsewhere, increasing the 2021-22 … carry-out stocks.”

FCC expects lentil margins to be positive even though some of the same conditions apply, although lower than in 2021-21.

The pressure on input prices is coming from farmers’ plans to seed big crops.

“With higher crop prices expected in 2021, each crop supply is forecast to increase in most cases. That will drive higher demand for fertilizer, causing a surge in prices for urea, ammonium phosphate and potash,” says the report.

“Other crop input prices (seeds and pesticides) will also likely increase ahead of planting ahead of seeding in the spring, softening crop margins.”

While the general world supply and demand situation is supportive for corn, soybeans and canola, as always China’s behaviour will have a big impact on what actually happens with demand.

In 2020 the underlying dynamic, more important than the U.S.-China trade war, was the rebuilding of the Chinese hog herd following African swine fever.

“With the shift to major commercial production has come an unrelenting need for feed imports and an increasingly interdependent relationship between the U.S. and China,” says the report.

That dynamic should continue in 2021. So too is the China-Australia dispute, which has seen China slash imports of Australian goods and is expected to continue, “offering further opportunities to step up North American exports to China.”

Currency exchange rates have a big impact on real-world values of agricultural commodities, and those are likely to be volatile this year, with unprecedented government and central bank interventions in the markets around the world due to the pandemic.

That continues a trend from 2020.

“(It) was a roller-coaster ride for many currencies in 2020, and the loonie was no exception,” says the report.

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