Canada Agriculture Profile 2012

Canadian Agricultural Prospects

Canadian agricultural production declined for the second straight year in 2010, falling 2.4%. The contraction was due solely to developments in the crop segment, where an earlier significant deterioration in prices reduced the incentive to produce major grains and oilseeds. Moreover, adverse weather – especially excessive moisture in the spring – hampered planting and harvesting in the Western Provinces and lowered yields. The end result was a 3.5% drop in crop production. By comparison, livestock prices held up quite well, contributing to a 1.5% gain in animal production last year.
Even though output fell for 2010 as a whole, activity in the sector picked up in the second half as pricing improved. In particular, grain and oilseed prices soared amid scaled-back expectations for global output due to weather problems in key exporting countries (e.g., Russia, Canada and policy responses aimed at containing inflation in a number of countries (e.g., export restrictions, stockpiling, consumer subsides). Moreover, livestock prices continued to firm as producers
trimmed herd size and livestock product demand rose with economic recovery and a loosening of trade restrictions imposed following animal disease outbreaks.

Outlook

Momentum during the second half of last year has carried over into 2011, with farm output up 3.3% (y/y) in January. Better prices, healthier global economic activity, and improved financial conditions will support the sector’s expansion this year. Farmers are responding to outsized price gains for grains and oilseeds with increased acreage. A recent Statistics Canada survey showed that farmers intend to raise by double digits the area planted to principal field crops. Given normal growing conditions and yields, this should lead to a notable increase in crop production.

Livestock farmers are similarly boosting output as meat demand and prices strengthen amid global economic recovery and greater market access. On the latter score, livestock production should get a shot-in-the-arm from the expected re-opening of the South Korean market to Canadian beef and increased pork demand from this same country following a recent domestic outbreak of foot-and-mouth disease that led to significant culling of its herd.
Overall, the agricultural sector is likely to expand by between 3.5% and 4% this year. Though there is a risk that flooding may limit yields, the crops segment is slated to grow at a somewhat faster pace than livestock, where activity will be constrained by smaller breeding herds and high feeding costs. Canadian farmers are likely to continue to experience solid financial performance this year, with crop and livestock prices expected to remain buoyant and output volume rising on stronger demand and improved yields.

Over the medium term, the agricultural sector should continue to experience growth in the 2%- 2.5% range, moderately above its longer-term trend. A healthy pricing environment for grains and oilseeds should support further increases in crop production. The prices of these commodities are expected to remain above historical norms and to trend higher over the longer term amid robust demand from developing countries, continuing expansion of biofuel production globally, and increasingly scarce resources (e.g., arable land, water). The demand for protein is also expected to expand briskly, as populations in fast-growth developing countries enrich their diets, which would be constructive for the livestock segment. Agricultural production should also benefit from the growing demand by advanced-country consumers for products embodying a diverse set of attributes related, for instance, to health, environmental sustainability and food safety. This offers scope for increased value-added as well as the development of niche markets (e.g., greenhouse vegetables, organics, and specialty crops).

While the fortunes of Canadian farmers have brightened along with a sanguine demand and price outlook, rising farm prices have put upward pressure on food prices at the consumer level, a trend that is likely to continue over the next several months. Overall, though, the increase in consumer food prices will be markedly less than that for primary crop and livestock products, given the small share of farm products in retail prices, the fairly small and declining share of household budgets spent on food, and heightened competition among food retailers. Moreover, because high farm commodity prices help to improve Canada’s terms of trade, this tends to dampen the negative impact of higher food price inflation.

Challenges

In order to capitalize on favourable demand and price prospects, farm operators will have to navigate a number of challenges. Input prices (e.g., for energy, fertilizer, and feed) have been rising again lately and are likely to remain high by historical standards, with greater variability. Volatility is being driven by supply disruptions, currency swings, government intervention in commodity markets to head off inflationary pressures, and greater involvement of speculative investment funds. Farmland values have also risen a great deal, given the prospect of longer-term agricultural commodity price strength. Rising and volatile input prices could keep upward pressure on costs, squeeze margins, challenge risk management capabilities, and ultimately constrain production.
In addition, the loonie has risen further and is expected to trade above parity with the U.S. dollar through 2012. The strength of the Canadian dollar will continue to constrain
exports, production and profitability, especially in those segments that are heavily dependent on foreign markets. And, amid increasingly global markets, Canadian farmers may also have to contend with trade restrictions related to plant and animal diseases, allegations of unfair trade, and food safety. These challenges compound inherent variability in farm production, stemming from the specific character of supply response in agriculture and the vagaries of the weather.
Success Factors
To adequately address the above challenges, Canadian farmers must continue to reduce costs through greater scale, technological advances and improved organization. They also have to increase value-added by catering to shifting customer preferences. Moreover, farmers will do well to boost sales to fast growing markets, where low per capita consumption and brisk income growth are lifting demand. In general, with demand for farm products growing sluggishly in North America, Canadian farmers must increasingly look to developing countries for growth.

The farm sector has shown remarkable ability to adjust, summarized in superior productivity growth, rising export orientation, a shift in output mix toward value-added products, and the launch of new enterprises (e.g., greenhouse vegetable production, specialty crops). These trends must remain intact for the sector to enhance its competitiveness. Despite being an overall challenge, the strong Canadian dollar does provide an opportunity for farmers to boost productivity with the help of imported machinery and equipment. Competition is intensifying as ‘non-traditional’ producers (e.g., Brazil, Argentina and Russia) make inroads into global markets. In addition, sophisticated risk management strategies will be needed to address volatility in input and output prices, production and profits. Given the need for ongoing cost reduction, innovation, market diversification and risk management capacity, consolidation is likely to continue on the basis of larger, more capital-intensive and more complex farming operations.

The Bottom Line

After two years of contraction, the agricultural sector is set to grow this year amid expanding global economic activity, improved financial conditions, and stronger prices. Output in both the crop and livestock segments is slated to increase at respectable rates this year. The sector should continue to grow over the medium term at annual rates moderately above the longer-term trend. Factors expected to support the industry’s growth include brisk gains in population and incomes in emerging-market countries, continuing expansion of biofuel production globally, and consumer concerns about nutrition and health, environmental sustainability and food safety, which are promoting value-added activity throughout the supply chain. However, in order to benefit fully, Canadian farmers must maintain and enhance their competitiveness, which will require superior productivity performance and proper risk management strategies.
 
 

Forestry

Fisheries and Furs