It is no secret that grain futures prices are low. With December corn at $3.37, November soybeans at $9.75 and December Chicago wheat at $4.05 its not good for the farmer psyche. That is especially true for our American friends who are not only getting hit by these low futures prices but also low basis levels as they go into one of the biggest harvests in many years. It may be setting up for a structural change in the American agricultural economy.
I say that because in some areas American land prices have been going down. There is also pressure on rental prices for 2017 and inevitable questions from agricultural lenders. How will American farmers make this all work?
It sure seems difficult from my perspective. For instance, we really don’t need any more wheat and for the last several weeks many American farmers have been asking analysts why they should even plant any this fall. Many of those analysts are having a hard time answering that question. We all thought we would be losing money planting corn this year based on futures prices last winter. However, we have one of the biggest crops ever in the offing of over 15.1 billion bushels. It seems that these low prices haven’t stopped our American friends from producing more and more corn every year.
It is quite different on the Canadian side of the border. We still get those low futures prices and in fact for the most part our basis levels are worse in American terms than many Americans. However, when the foreign exchange calculation is done our cash prices are not as low nominal values as our American friends. For instance, new crop corn values in southwestern Ontario are approximately $4.30 a bushel. New crop soybeans are valued at approximately $12.20 a bushel. Canadian price optics win out on this and it’s showing up in some of our Canadian agricultural discourse.
According to the Farm Credit Canada, “strong income levels and rising farmland values have kept Canadian farmers and sound shape”. This is largely because the weaker Canadian dollar has softened much of the blow from lower futures prices for Canadian producers. FCC often comes across to me as overly optimistic in these things. My colleague FCC chief agricultural economist J.P. Gervais was quoted in Grainnews last week as saying, “We think we’re going to be able to ride the wave of strong income a few more years.” It just goes to show Canadian farmers think about foreign exchange almost on an hourly or daily basis. Our Canadian dollar has really helped us in this price trough over the last two years.
So, will these foreign exchange “good times” continue in the next few years for Canadian farmers? Clues might have been given by my (tongue in cheek) lost twin brother Bank of Canada governor Stephen Poloz, said last week, that weak inflation and slower economic growth has lead to maintaining its bank rate at 0.5%. We had a few problems in Fort McMurray reducing our GDP, but he does expect economic growth to expand in the fourth quarter of 2016. Needless to say, this outlook from the Bank of Canada means those supposedly good times for Canadian farmers at least on an interest rate level should continue.
What that is likely to be is a continuation of capital being borrowed and put into assets with greater returns, specifically farmland. While our American friends have seen it go down in many parts of the country, it is simply slowed in Canada. Also, the influence of the Canadian supply managed agricultural sector keeps the land market buoyant. Guaranteed cash flow in the era of low interest rates has translated into inflated land values that should see no abatement in areas where that sector is dominant.
It begs the question what will happen if grain futures prices ever lift up substantially from their near contract lows of the last few weeks? Keep the Canadian dollar at 77 cents and you have $5.50 corn and $14 soybeans quite easily. With interest rates the way they are, it means more “health” for the Canadian farm economy.
Of course it is based on the foreign exchange “mirage” creating these higher price optics. There would be fire sales in Canadian agriculture comparatively if we had the loonie at par like we did in 2013. Even in 2016 we need to question our farm “purchasing power” in US dollar terms. However, sometimes I think it convenient to ignore that, and just engage in the Canadian dollar inversion.
According to Stats Canada, our total farm debt reached $91.8 billion in 2015. Many say it will top $100 billion in 2016. Why not $110 billion in 2017? Just let those (gulp) good times roll.