Ag industry must plan for even greater volatility in future

By Tim Kalinowski

Farm Credit Canada chief agricultural economist J.P. Gervais says ongoing market volatility is having a noticeable impact on the Canadian agriculture industry, and what it amounts to is a net negative in exports for producers this year over last.

“In the short term this volatility is negative for Canadian agriculture,” confirms Gervais, “but I do think it has some very specific examples of how it can actually make a case there are some positives there. I identified soybeans as one. Canola is another perhaps. But overall volatility has dampened (Canadian) exports.”

FCC recently released its report entitled “Navigating Trade Disruptions and Volatility.” The report looks at five major agricultural commodities Canada exports in large quantities — canola, wheat, pork, beef and soybeans — to examine how high levels of market volatility produced by the ongoing trade war between the United States and China, oversupply in some commodities and Futures Market speculation has impacted Canadian agricultural exports.

Gervais reports while canola and wheat exports have been fairly bulletproff thus far when it comes to movements in the marketplace, (ranging between a 2.8-per-cent drop in some export markets to a higher decline of 7.6 per cent in others), pork and beef exports have taken huge hits this year. Pork export declines ranged between 2.9 per cent to as much as 30 per cent year over year in some of Canada’s major export markets. Beef exports have dropped between six per cent and 21 per cent in major export markets.

Only Hong Kong is bucking that trend, recording an 11-per-cent increase in imports of Canadian beef this year over last.

Soybeans are the only one of the five commodities measured which had a marked net increase in exports, up by as much as 18 per cent to Spain and 3.7 per cent to China, for example. But even that push upward does not convey the whole picture, says Gervais.

“I do believe selling more at a lower price is not always a good thing,” states Gervais. “In this case, given the extent of the decline in the soybean price, given that the Canadian price is not adjusted as much to compensate, and the dollar has remained pretty much in that narrow range of $0.76-$0.78 US, I do think overall the impact has been negative from a revenue standpoint.”

What it means for producers in the field is having to calculate their risks carefully, and finding ways to hedge against potential, ongoing market disruptions as trade wars continue to fester around the world.

“I think there is a risk management lesson in all of this,” states Gervais. “For the most part producers have good production risk plans in place.

“From a financial risk standpoint, I think most operations understand in this higher interest rate environment the need to have a good financial risk management plan in place.

“And if their is a lesson from a marketing standpoint, there is also a need to have a risk management plan in place from a sales standpoint.

“I always thought there was an incentive to have one, but I think there is even more of an incentive now with the state of global trade than in the past.”

Gervais predicts ongoing volatility will likely begin to also affect planting and production decisions on the ground for most Canadian farmers in the upcoming year. But where do you turn to when most commodities are in surplus around the globe?

“If you think about what has happened in the pork market, for example,” says Gervais, “where we have seen hog prices decline significantly— one of the drivers that didn’t get much attention, I would argue, is the fact that the supply in the U.S. keeps on increasing, and increasing significantly. That (oversupply) puts additional pressure, and now, on top of all that, you bring in the African swine fever that reverses some of the trends we have seen in pricing in the pork and hog markets.”

“So I think for sure this volatility will have an impact on planting crops, and producers will likely try to extend the time they have to commit to. So I think it is going to be interesting both in the U.S. and in Canada.”

One area Gervais is not as concerned about is the role Futures Market speculation has in increasing the volatility rollercoaster ride.

“What you call speculation, we call forward-looking behaviour,” he says. “So speculation is just good business sense to say I am going to lower my position in commodities for whatever reason … I don’t doubt for a second there is a lot of that going on, but when it comes to fund behaviour and the impact it has on reference prices and the Futures Markets and so on— there are quite a few studies the impact of that (speculation) at the end of the day is really quite limited.”

Gervais says while this year has been a bit of a rough patch due to ongoing trade uncertainty pushing greater volatility into the marketplace, he is confident Canadian ag exporters and producers can weather the storm.

“I do think we are well-positioned to navigate this,” confirms Gervais. “Long term, I am absolutely positive demand remains very strong for what we sell, but short-term volatility is going to create a decline in performance.”