Drought brings price spikes – and opportunities

Regina, Sask. – According to a senior agriculture economist with Farm Credit Canada (FCC), the widespread drought in the U.S. could create opportunities as well as challenges for producers in Canada.

Jean-Philippe Gervais says Canadian producers are not immune to the impacts the drought could have on commodity prices, input costs and industries connected to agriculture.

“The ripple effect is already impacting some commodity prices,” he says, “and it matters to all Canadians because one in eight jobs in Canada is connected to agriculture and the agri-food system.”

U.S. production

The U.S. accounts for nearly 40 per cent of world corn production and 35 per cent of world soybean production. Significant changes in U.S. production can have a major impact on world prices for these commodities and, in turn, all agriculture commodity prices. This year’s U.S. drought is the most extensive since 1956.

According to the U.S. Department of Agriculture, the decline in the corn and soybean crop is unprecedented. The average national corn yield is expected to be 123 bushels per acre or 10.8 billion bushels nationally, down from July’s forecast of 146 bushels per acre or 13 billion bushels. This represents a decrease of approximately 20%. Projections for soybean yields were also reduced. At the same time, price projections for all feed grains were raised substantially.

Price spikes have benefits

Gervais says corn and soybeans have already experienced price spikes, which benefits Canadian producers in general, as well as Western Canadian farmers who grow canola and wheat. These commodities are seen as substitutes for corn and soybeans.

Conditions remain favourable for most commodities throughout Canada, with some exceptions.

Dry conditions and poor soil moisture may reduce corn and soybean production in parts of Ontario and Quebec. Some producers in the Prairies are dealing with excess moisture and disease.

But generally, most Canadian crop producers are facing a positive outlook.

“At times like this, when crop producers are benefiting from higher prices, they should look at their financial management plan to see if accelerating debt repayment is possible,” says Gervais.

Livestock producers

With a more scarce traditional feed supply, costs for feed are escalating, which adversely affects livestock producers.

“For Canadian cattle producers, it will likely be a case of short-term pain followed by long-term gain,” says Gervais, who noted that cattle prices should rebound over the long haul as U.S. producers reduce herd sizes due to the drought conditions, which happened in Texas last year.

The impact of higher feed costs on Canadian hog producers is compounded by the challenges faced by the industry in recent years.

Facing higher input costs

When facing challenges posed by higher input costs, planning and execution are key.

“Risk management tools, such as price contracts and hedging feed costs, can help make the best of a difficult situation,” says Gervais.

The market impacts of adverse weather events are usually short-lived, but Gervais notes that the current drought has occurred at a time when stocks were already below historical average levels.

“It is more important than ever to determine what your risk tolerance is, and stick to your marketing plan,” he says.