Special Report
November 26, 2019 | 07:51
North American Harvest Report
Economics
Economics
Global crop markets look set to remain broadly oversupplied in the near term despite less supportive global growing conditions this year. Although production has eased, inventories of most major crop products remain elevated due to better-than-average growing conditions over most of the past five years and the continued adoption of productivity-enhancing technologies across the industry. In North America, trade hostilities have aggravated the supply-demand imbalance by reducing access to overseas markets and stranding product on the continent. As a result, benchmark crop prices remain near decade-lows, which is taking a major toll on farmers in the United States, though the impact in Canada has been softened by the relatively low loonie. Leaner harvest in the United States and CanadaIn the United States, composite crop yields are on track to come in roughly 3% below trend this year, which marks the first sub-trend reading since 2013 (Chart 1). Weaker yields have mainly resulted from an extremely difficult planting season this spring, after the wettest 12-month period on U.S. record left fields saturated and, in many cases, submerged. Flooding delayed corn and soybean planting by weeks across much of the Midwest, and although the weather improved during the summer, the harvest has been taking place far later than usual. Overall, the U.S. Department of Agriculture (USDA) estimates that the corn harvest was only 76% complete in mid-November (against a five-year average of 92%), while the soybean harvest was only 85% complete (against a five-year average of 95%). The lagging harvest has left a significant portion of the crop exposed to degradation from frost and snow—especially soybeans, which are particularly vulnerable to cold weather. Meantime, the spring wheat harvest in the Northern Plains has been hindered by early winter weather, including more than a foot of snow in October across parts of the Dakotas, which will weigh noticeably on the quality and size of the crop. Total crop output has also been restrained by a 4% decline in national farm acreage this year, as the weak pricing environment has pushed smaller producers to the sidelines. Overall, U.S. corn and soybean production are likely to fall to multi-year lows this year, while wheat production will edge up only slightly from depressed levels. |
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North of the border, Canadian farmers have grappled with difficult conditions for a second straight year, with composite yields estimated around 5% below trend. In the Prairie Provinces, the weather was frustratingly dry during spring planting and a rainy fall season has caused widespread harvest delays—especially in Saskatchewan, where the harvest has unfolded at the slowest pace in decades. In mid-October, crops left standing in the field then fell victim to the same early winter storm that hit the northern United States. Lower acreage will weigh even further on Prairie crop production, particularly in the canola space, where planting has declined sharply due to the drag of the U.S.-China trade war on oilseed prices. In the east, farmers in Ontario struggled through a wet, late planting season, but harvest conditions have held up better than in the Prairies and the mold problems that beset last year’s corn crop have fortunately not resurfaced. Overall, Canadian corn production will likely edge slightly higher this year, but soybean production is expected to decline sharply due to a plunge in acreage, which is also attributable to the U.S.-China trade war. Outside North America, lacklustre growing conditions in some regions left composite yields an estimated 1% below trend this year—the first meaningfully below-average result since 2015. Corn and soybean yields were both dulled by dry conditions across parts of South America, while wheat yields were held back by the unending drought in Australia and challenging conditions in the Black Sea region. Nevertheless, stronger acreage is expected to boost overseas production of most major crops at least modestly this year. Some of the largest gains are being posted in the soybean space, where overseas producers are keen to offer China an alternative to U.S. supply. Market balance improving, but prices still lowLower yields and production have helped push most major crop markets back in the direction of balance (Chart 2). In its latest estimates, the USDA projects that world inventories of corn, soybeans, and canola will all decline during the current marketing year—both in absolute terms and relative to consumption. However, wheat inventories are expected to edge higher despite weak yields in some growing areas, reflecting strong harvests in other regions (most notably in Europe) and an increase in global acreage. |
Unfortunately for farmers, the moderate reduction in global inventories has not been enough to meaningfully improve crop prices, which remain low across the board (Chart 3). Perhaps most importantly, a sustained abundance of wheat—the world’s most widely-planted crop—is weighing broadly. And, compared to longer-term norms, global corn stocks remain high relative to consumption. In the soybean space, global inventories are moderate relative to consumption, but North American inventories remain far above average due to the ongoing trade war, which is depressing benchmark prices across the oilseed complex—and inflicting collateral damage in the canola market. Canola is also facing trade headwinds of its own, after China (the world’s largest importer) closed its borders to shipments from Canada (the world’s largest exporter), ostensibly due to contamination concerns. The strong U.S. dollar is yet another headwind for benchmark crop prices. A softer demand environment has also hindered inventory normalization. At the broadest level, global economic growth has downshifted from an average of 3.7% per year in 2017-18 to an estimated 2.9% in 2019, which has weighed on commodity prices in general. Within North America, growth in consumer food spending has slowed alongside overall household spending over the past year and aggressive competition among grocery retailers has maintained an unrelenting focus on costs throughout the agri-food supply chain. At the same time, global demand for livestock feed has been weakened by the spread of African swine fever in Asia and parts of Europe, which has led China to cull more than 30% of its world-leading hog herd (equivalent to the destruction of every hog in North America, and then some). All of this has prevented a more meaningful drawdown of global crop stockpiles and a more forceful recovery of in pricing. Tough times for U.S. farmers; loonie a saving grace in CanadaIn the United States, a half-decade of weak crop prices has taken a serious toll on farmers, with aggregate crop industry revenue down 15% since peaking in 2012 (Chart 4). Farmers have also faced rising wage, fertilizer, fuel, and interest costs over the past few years, which has applied additional financial pressure—though fuel and interest costs have fortunately started to ebb. This year, the federal government has made $16 billion available to compensate farmers for the trade war with China, building on last year’s $12 billion package, but this won’t offset the financial drag of continued oversupply. At this stage in the economic cycle, with global demand slowing, a meaningful improvement in U.S. farm fortunes will likely require further rationalization of global supply. |
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