My crystal ball shows risk in expecting higher food prices

The world will need more food but unless production increases can’t meet that demand, today’s prices probably won’t change much

I attended the annual conference of the Agricultural and Applied Economics Association, held recently in Boston. Conferences of this type are always tainted by the flavour du jour. Hence, no surprise that conversations were dominated by the current downturn in U.S. agriculture.

I was left with a couple of key takeaway thoughts for Canadian agriculture.

First, the next 12 months spell tighter margins across most sectors. For corn, demand is slightly growing, the potential for a record U.S. crop coupled with larger world production mean U.S. corn prices will trend lower than they are now.

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Human hand holding soybean, with field in background

Meanwhile a large wheat supply means that a price rebound rests on future export demand strength. There are mixed opinions on whether this is likely to occur.

For soybeans, anticipating South American production is difficult. Reforms at the end of 2015 in Argentina may reverse a long-term decline in seeded grain areas at the expense of soybeans. Meanwhile producers in Brazil face cash flow constraints that can limit their production potential. Hence, stocks are expected to tighten next year, supporting prices at very decent levels. Soybeans may be the only exception to tightening margins.

For cattle, there are signs that U.S. herd expansion is slowing (such as higher heifer slaughters in June). Projections call for a four per cent growth in U.S. beef production, with an additional increase in 2017.

The immediate future may be challenging for U.S. hog producers as projections call for break-even, or slightly worse, returns.

Dairy: Supply continues to grow in the U.S., with a potentially small increase in the price of milk coming in 2017. Skim milk powder prices are expected to remain low.

Secondly, global food demand is growing. But so what?

We know the story: Population growth and rising incomes (mostly in the developing world) mean agricultural output needs to grow to meet increasing food consumption.

The most relevant issue for producers: What will the future trajectory of prices be? To answer this question, one must compare projections about the pace of growth in production versus demand. If demand grows faster, prices are bound to climb in order to trigger more resources (land, labour, etc.) into agricultural production.

A study presented at the meeting argued that the pace of increase in crop productivity is where the uncertainty about future prices comes from. And the most likely scenario is that, despite global crop production projected to nearly double over the next 50 years, prices are roughly going to be equal in 2050 to what they are now (after adjusting for inflation).

A similar story can be described for livestock prices, with the caveat that there is even more uncertainty with regards to long-term prices.

So what does this mean?

In the long run, it looks hazardous to build long-term business plans on the notion that agricultural prices will climb. The level where prices are now is probably a reasonable reference point to project future pricing trends. In the short term, the lower Canadian dollar will continue to buffer some of the lower price pressures recorded in the U.S., supporting margins of Canadian producers.

– J.P. Gervais is the chief economist for Farm Credit Canada. Follow him at @jpgervais on Twitter. This article first appeared in the Aug. 29 issue of Alberta Farmer Express (page 4).

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