FCC Ag Economics is doing a mid-year check-in on our January 2018 Outlooks. Throughout July, we’ll update our expectations about profitability in six Canadian ag sectors (crops East and West, hogs, cattle, dairy and food processing). We’ll describe what’s happened in 2018-to-date and what we think you should monitor in the next six months.
As the 2017-18 marketing year (MY) winds down, our January forecast holds fast for several Canadian crops. Corn production should remain profitable in 2018. Canola too will see positive margins till the end of the year, although they’ll be more pressured than they were in the first half. We still expect red lentil margins to be negative. Green peas should begin to see some upside, becoming slightly profitable for the remainder of the year. Wheat won’t likely be profitable despite some recent upside in pricing and global uncertainty has helped drop the soybean price to levels that, if sustained, likely mean breakeven profitability or slightly better.
The US$0.78 loonie helped boost Canadian revenues during the first six months, offsetting increases to interest rates, and fuel and fertilizer prices.
Corn
Global corn production in 2018 is forecast up from a year ago, helping to meet global demand which is expected to grow 2% by the end of the 2018-19 marketing year. Despite those production increases, world ending stocks are expected to shrink 38 million metric tons in that time which, if realized, would be the lowest stocks on record since 2012-13.
With fewer acres seeded to corn and lower yields expected, U.S. year-over-year corn production is forecast down in 2018. Both exports and domestic use should also be reduced throughout 2018-19 except for corn used for ethanol, reflecting expected gasoline consumption growth. With supply slowing more than demand, the 2018-19 U.S. ending stocks are forecast down 525 million bushels from last year.
Although the 2017-18 corn price received (US$3.25) hasn’t changed since January, corn futures prices for the 2018 crop had risen until the end of May because of those expected low stocks levels. The USDA projects the U.S. 2018-19 farm price to average US$3.80, up US$0.50 from the 2017-18 average. But the December 2018 corn price is under pressure with a higher-than-expected U.S. 2018 supply. Assuming this translates into a proportional pressure on Canadian corn prices, the 2% annual increase in Canadian corn acres planted in 2018 may not be large enough to raise corn revenues.
Soybeans
We also expect lower ending stocks for U.S. soybeans in the 2018-19 marketing year. The record U.S. 2017 crop will likely decline this year with an expected drop in acres. While solid domestic demand and a sustained strong pace of imports is expected to lower global ending stocks for 2018-19, overall soy imports and prices are now uncertain, given China’s escalating trade tensions with the U.S.
That’s not necessarily a slam-dunk win for Canada. Chinese buyers faced with paying U.S. tariffs may buy more Canadian soybeans, but that positive impact might be more than offset by negative consequences. Given China’s capacity to determine the world price – they import close to 2/3 of the world’s soy imports – they can shift global trade flows between and among the world’s major traders in ways that might disadvantage Canada, and ultimately lower the U.S. reference price.
Uncertainty will, at the very least, introduce price volatility and an ambiguous U.S. farm price (US$8.75-$11.25 per bushel compared to US$9.35 per bushel in 2017-18). Despite the potential for risk, we expect the sector to weather the storm. Canada’s total area seeded to soybeans is projected to have sharply decreased in 2018 after rising to a record-high 7.3 million acres in 2017.
Canola
With global oilseed production projected to rise in 2018-19 year-over-year, global exports should also increase, although soybeans (as of June) are expected to account for most of the increase. The added production will be used in a higher crush during the next MY, leading to lower ending stocks compared to 2017-18. Total U.S. oilseed production for 2018-19 is forecast to decrease from 2017-18, although canola production forecasts are higher.
Canola prices dropped more than expected in the first half of the year, in tandem with soy’s drop. The decline in canola was more muted however, leading to our forecast of an average price of CA$11.30 per bushel for the rest of the year. Statistics Canada estimates that Canadian producers seeded a record-high 22.8 million acres of canola in 2017, and will be planting just 1% fewer acres in 2018. This decline would lower the stocks-to-use ratio and likely support canola prices.
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