There was a lot of negative economic news in 2022 including the War in Ukraine, a potential recession, and ongoing layoffs (just to name a few), but we are happy to report that Canadian crop yields did not make that list! While farmers in Canada have had a tumultuous few years, and continue to face ongoing legislative battles, they generated crop yields that were up 38% YoY while prices for cereal crops increased 35% YoY. Other agriculture stakeholders have taken notice on this news; specifically, the Canadian Big 6 Banks have increased their agriculture exposure by 11% YoY. So much for that old saying that farmers are the richest poor people out there, they now have the cash flow to back up the land value.
Canadian Crop Yields Are Back: After the devastating drought in 2021, Canadian farmers welcomed a 38% increase YoY in overall crop yields. Of the cereal crops, wheat (+51%), canola (+32%), barley (+43%) and corn (0%) had an outstanding year but are still below pre-COVID levels by approximately 3%. Coarse crop yields (i.e. oats, soybeans, etc.) also increased by 52%, on average.
Canadian Crop Yields, 2000-2022
While we don’t have full visibility into the weather, geopolitical, or inflationary factors that impact farmers going into FY2023, it is clear there are tailwinds in the agriculture sector. Structurally, global supply for agriculture commodities will likely remain in flux due to the ongoing conflict in Ukraine and political uncertainty in Brazil, which could result in the continued elevation of commodity prices. In addition, excess cash flow available to farmers will likely result in expansionary activity in the sector (did you see the strong John Deere results recently?), and lenders should prepare themselves for an influx of capital requests. There may be an opportunity for more non-Big 6 lenders to gain exposure to the space as the Big 6 begin to tighten their credit facilities in the face of a potential recession.
Global Cereal Crop Commodity Prices, Monthly (Jan 2000 - Dec 2022)
In the wake of Russia’s invasion of Ukraine in February 2022, commodity prices for cereal crops (i.e. wheat, corn, barley, etc) spiked to reflect ongoing supply uncertainty. Since then, prices have softened but continue to remain 84% above pre-COVID levels. The largest price question going into 2023 will be about global supply for these crops –initial projections from OECD expect the global production of wheat to increase 10% between 2022 and 2030, with most of the increase expected to come from India, Brazil, Ukraine and Russia. If the Ukraine-Russia conflict persists, along with political tension in Brazil, the price of agricultural commodities is expected to strengthen –we will continue to monitor these developments.
Big 6 Canadian Agriculture Lending
During Q4/2022, the Canadian Big 6 banks continued to increase their exposure to the agriculture sector (+2% QoQ, +11% YoY). Going forward, there may be an opportunity for non-Big 6 lenders to increase their exposure to the agriculture industry as the Big 6 tighten credit availability due the rise in interest rates and pending economic weakness (see previous Digests for DWA’s expectations that Banks will decrease credit early in 2023). Canadian farmers will still require access to capital, and non-Big 6 lenders can fill this gap. We will continue to monitor this trend in FY2023.
Global Cereal Crop Production by Nation, 2022
In order to understand the dynamics of the agriculture sector one must look at the market on a global scale.
Those countries that produce the largest cereal crops include: China, USA, the EU, India, Brazil, and Russia. Disruptions or bad weather in any of those key regions can have global ramifications.
Even Ukraine, despite being only 3% of global production, triggered major price increases given the supply disruptions caused by the war.
Cereal Crop Exports By Nation, 2021
Those countries that benefit most from a strong agricultural sector not only produce material crops but also export them. Countries that benefit most include: USA, Ukraine, Russia, Australia, Canada, and Brazil.
Cereal Crop Imports By Nation, 2021
Or in this case, feed your people. Major importers are more at risk of rising agricultural product prices. Globally, those countries most negatively impacted by the current strong market include: Mexico, Japan, Iran, Korea, Vietnam, and the Netherlands.
Sources: Bank of Canada, Bloomberg DXY Index, Company Reports, Diamond Willow Advisory.
