U.S. drought presents opportunities and challenges for Canadian producers

Aug. 14, 2012, Regina, SK - Widespread drought in the United States could create opportunities as well as challenges for Canadian producers, according to Farm Credit Canada's Senior Agriculture Economist Jean-Philippe Gervais.

"Canadian producers are certainly not immune from the impacts the near-record drought could have on commodity prices, input costs and industries connected to agriculture," said Gervais, after reviewing the latest United States Department of Agriculture (USDA) drought update. "The ripple effect is already impacting some commodity prices and it matters to all Canadians because one in eight jobs in Canada is connected to agriculture and the agri-food system."

The U.S. accounts for nearly 40% of world corn production and 35% of world soybean production. Significant changes in U.S. production therefore 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 USDA, 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.

Gervais mentioned that 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 the 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. Thankfully, 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," Gervais said.

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," said 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.

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," Gervais said. "Another strategy used by hog producers is to maximize feed efficiency by adjusting diet formulations and ensuring that feeding equipment is working accurately. Producers may want to revisit their planned marketing weight of pigs in relation to weight discounts and feed prices. They should also think about running the numbers to see what makes sense for their operations. This is a great example of the complexity of production and marketing."

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 said.

As Canada's leading agriculture lender, FCC is advancing the business of agriculture. With a healthy portfolio of more than $23 billion and 19 consecutive years of portfolio growth, FCC is strong and stable - committed to serving the industry through all cycles. FCC provides financing, insurance, software, learning programs and other business services to producers, agribusinesses and agri-food operations. FCC employees are passionate about agriculture and committed to the success of customers and the industry. For more information, visit www.fcc.ca.