The dry conditions are also having their effect on beef and dairy producers. The quality of pastureland in the U.S. is suffering. As a result, the increased demand drives up feed prices as well.
Farmers feel these effects as rising input costs (feed, fertiliser, etc.). That puts pressure on their margins, even as the prices for their crops increase because of reduced supply.
And the dry weather isn’t just a challenge for North American producers: Yields of Russian wheat are also suffering from drier-than-normal conditions.
Increased input costs are encouraging some livestock producers to offset the increase in feed prices by reducing the size of their herds.
Of course, this sell-off will push prices down in the short term. However, once that inventory moves through the system, prices will increase again as demand continues to grow.
Higher commodity prices have a direct impact on food prices. These increases will be particularly acute to the growing populations in the developing world.
Corn, soybeans and wheat have all increased by about 20 percent since last season. And these increases may put a damper on purchasing as manufacturers may choose to leverage their inventories and wait for prices to come down.
Weather events and global economic challenges are largely beyond our control. But while we can’t control the weather, there are ways farmers can lessen the effects of these unnaturally dry conditions on their production.
First of all, make sure you have a handle on your input prices. Speak to your suppliers about your options in terms of decreasing or deferring these costs.
When there is uncertainty or a shortage, planning is key. So speak to your suppliers about price contracts.
Secondly, contact your banker early on if you do expect margin pressures to significantly decrease your income, even in the short term. Again, there may be options to reduce mortgage or other financing payments.
And make sure your livestock, crop or income insurance is up to date. Stay in close contact with your agent and report any significant damage immediately.
It is also a good idea to familiarize yourself with the Farm Income Protection Act. Agriculture and Agri-Food Canada has plenty of online resources.
You can also contact your local government office. Make sure you understand how the provincial and federal governments may be able to offset some of the effects of crop damage or decreased yields caused by drier-than-normal conditions or outright drought.
Another option more farmers are considering to manage the risk of the unknown is diversification. This is a reasonable strategy, particularly as people’s needs and tastes are changing.
For example, where beef and grain used to have a roughly equal split in terms of production, beef is on the decline and grain and oilseed production are increasing.
These changes in consumption are the result of various geopolitical and socioeconomic forces. Rising input costs and land prices – due to the development of prime farmland for housing – are causing some producers to grow new, niche crops.
And the steady rise in oil prices, environmental protection and sustainability concerns has some farmers considering the opportunities of biofuel production.
In fact, over the next 10 to 20 years, many farmers could find themselves producing, directly or indirectly, alternative sources of energy. Wind or solar panel “farming” will certainly become more commonplace.
On the upside, the drought in the U.S. may be of some benefit to Canadian producers. We’ve been lucky – it’s been a hot summer but we haven’t had the same devastatingly dry conditions as our neighbours to the south.
Our yields should be much closer to forecast and the crops will be worth more. The U.S. produces such a significant amount of the world’s corn and soybeans that the reduced yields are bound to have a significant impact on food prices around the world.
Of course, these effects will take a while to move through the system; most experts think by mid-2013 consumers will notice increases at the grocery stores.
But everything is relative; in Canada we enjoy cheap prices for food. The increased costs are going to be much more significant in the developing world, as the trickle-down effect increases the price of all grains, including rice.
Another opportunity for producers benefiting from an increase in commodity prices is to take a good look at your finances, particularly debt, and see if there are options to accelerate payments on a mortgage or a loan.
Higher crop prices may also provide opportunities to invest the surplus money into new equipment or machinery. So if you can, take advantage of surplus cash to pay down a debt.
It’s been a challenging summer for many farmers in North America and around the world. And because almost three million Canadians are employed in agriculture and the agri-food business, it’s safe to say that reduced yields and increases in commodity prices will have an effect locally as well as globally.
Fortunately for most families, the impacts should be modest and the increase in prices, while expected to be short-lived, may actually put a lift in the profits of many farmers over the next six to 12 months. PD
- Craig Bremner
- VP Agriculture Services
- TD Business Banking
