Forecasting the economy is a lot like forecasting the weather. Both are reliably unreliable.
For predictions of the agricultural economy, you need to forecast both the weather and the general economy, not only at home, but also in key importing and exporting regions around the world. Needless to say, there are poor odds of getting it right, particularly if you try to forecast an entire year.
But here’s what we know.
Most of the Western Canada has a sizable moisture deficit. Average rainfall this spring and summer will not be enough to produce an average crop, especially in southern regions.
In many years of the past decade, too much moisture has been an overriding concern. Other times, it has started out dry in the spring and everything has turned out just fine. So there’s no use panicking, but soil moisture levels are a concern nonetheless.
(Interestingly, the mainstream media gives about the same credence to The Farmers’ Almanac as it does to The Weather Network or Environment Canada when it comes to long-range forecasts.)
We also know that lentil and pea prices have fallen dramatically and show few signs of a timely recovery. Lentils have been a big money-maker, the go-to crop for many farmers in the southern and central grain belt of Saskatchewan. Lentils look far less attractive for 2018 and there will be a significant switch to other crops.
Canola will likely capture much of the acreage switching out of peas and lentils. While canola prices continue to grind lower, the crop still looks favourable compared to competing options.
Crop insurance coverage will be good for most crops. Since the prices used for crop insurance are based off estimates made in December, any further decline in canola prices won’t be captured. However, producers have a tendency to misinterpret their crop insurance protection.
Let’s say your average canola yield is 40 bushels per acre. At 80 per cent coverage, your crop insurance yield guarantee is 32 bushels an acre. Let’s assume the crop insurance price for canola is set at $10 a bushel providing coverage of $320 an acre.
Too many producers look at this number as the worst-case scenario. No matter what happens in the growing season, be it drought, hail or flood, they think they’ll have $320 for each acre of canola to work with.
But of course, crop insurance is production insurance, not price insurance. What if you grow a 32 bushel per acre crop and the market price is only $8.50 a bushel? There’s no crop insurance payout and your gross return is only $272 an acre.
While weather and economic forecasts are fraught with inaccuracy, one forecast that’s true eight or nine years out of 10 is that nitrogen fertilizer prices will rise in the months leading up to seeding.
True to form, the market is showing signs of marching higher. Alberta Agriculture’s farm input price survey shows a substantial rise in urea prices from October to November. It’ll be interesting to see the numbers posted for December.
Forecasting interest rates has been a pretty safe bet for a lot of years. Even if they do edge upwards in 2018, the impact on farm income shouldn’t be significant.
The value of the Canadian dollar is another matter. A Canadian dollar that rises about 80 cents would significantly curtail grain prices and farm income levels.
Moisture, crop prices, Trump, Trudeau. Overall, there are many good reasons for caution as we head into 2018.