Keep an eye on U.S.-China trade war

Jan 09, 2019

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Expect another year of tight margins in the Canadian crop sector for 2019, Farm Credit Canada predicts in its Ag Economics outlook.

“2018 was certainly a case of tighter margins for grains and oilseeds and pulses, and we’re still heading in that direction,” says J.P. Gervais, FCC’s vice-president and chief agricultural economist.

Barring a supply disruption in a major crop producing area of the world, he doesn’t see much upside for grains and oilseeds prices. With climbing farm inputs, profitability margins will be under pressure, Gervais says.

China

The outcome of United States-China trade talks will set the tone for 2019, Gervais adds.

China bought no U.S. soybeans in November and supply shortfall was made up by purchasing from Brazil. Simon Briere, market strategist with R.J. O'Brien & Associates Canada wonders if China decides it can get by with Brazilian production, whether Brazil-China soybean trade could become permanent.

“They’re far behind on infrastructure, it’s sometimes a big hurdle for deliveries, but I know China is investing massively in infrastructure in Brazil,” Briere says.

Also challenging Brazil’s prospects as a bigger supplier is current dryness in the country, which is likely to hit yields.

U.S. soybean acres

If the U.S. resolves its differences with China soon, American soybean acres may not fall this spring, Gervais says. Otherwise, they may decline four to five per cent, perhaps as much as eight per cent, Gervais predicts.

Acres would then shift to more corn and wheat, which would pressure values in Canada.

If U.S. soybean acres fall nearly seven million acres in 2019 as United States Department of Agriculture predicted in November, that will likely be split between corn and wheat, Briere says.

The caveat, though, is that many farmers weren’t able to ready their fields for corn last fall. Combined with higher input prices, farmers may not be keen on planting corn, resulting in possibly more soy acres than expected, Briere indicates.

That in turn would be bearish for soybeans and bullish for corn and wheat.

Pulses

Canadian pulse acres won’t come down, but neither will they go up, foresees Gervais.

Kostal Ag Consulting president Greg Kostal adds pea acreage has a shot at tilting slightly higher, with green peas most likely moving upward. Not so red lentils, however.

Long-term, the pulse sector has a positive outlook, Gervais says. He predicts India buying will return, and adds Canada’s Protein Industries Supercluster is a positive development.

Lower dollar

A major bright spot for growers is a low Canadian dollar, which FCC forecasts averaging US$0.75 in 2019. That’s down from the previous year’s $0.77.

Another is preferential trade access to Asian and European markets.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership, for example, could allow Canada to expand its wheat market in Japan – at the expense of the U.S.

“In a world where there’s lots of supply, it’s the fact we have strong demand for the commodities that we sell that remains the biggest positive driver of profitability in 2019,” Gervais says.

But ongoing trade strife between the U.S. and China threatens a continued world economic slowdown, which would impact commodity demand, Gervais says.

Source : fcc