TORONTO, ONTARIO and CHICAGO, ILLINOIS--(Marketwire - Aug. 9, 2012) - The outlook remains positive for the agriculture sector in Canada and the United States, despite a severe summer drought, according to a panel of agriculture experts at BMO Financial Group. While there has been damage, a record acreage planted earlier will help offset a lower yield; food prices are not expected to soar for consumers, and sustained demand globally will bolster share prices for agriculture companies.
The outlook was presented today by BMO Strategy Advisor Don Coxe, David Rinneard, National Manager of Agriculture for Canada, and Sam Miller, Managing Director and Group Head, Agriculture for the U.S.
The weather has been unforgiving in the U.S. Midwest this summer, leading to the worst drought the U.S. has seen in 56 years. Reports estimate that at the end of July, nearly two-thirds of the continental U.S. was experiencing some level of drought. In Canada, Ontario has had its driest summer in 47 years.
From mid-May to late July, the price of corn soared 35 per cent. However, pricing has since eased to US$8.03/bushel in early August, down nearly 40 cents from July. While the United States Department of Agriculture is forecasting a 4 per cent increase in food prices, there are factors mitigating a more dramatic rise.
"Agricultural prices have probably gotten ahead of themselves and could back down once there is greater clarity as to what the crop yield will be," said Mr. Rinneard. "Agri inputs account for less than 50 per cent of the total cost of processed food; labour and transportation costs are larger."
The states most heavily affected by the drought are Indiana, followed by Illinois, Missouri, and southern Wisconsin.
If sustained, however, the surge in corn prices would raise production costs for many agricultural and food enterprises, noted Mr. Miller. "Unable to fully shift cost increases to consumers and given the widespread application of corn and corn-derived products in food processing, many food companies are likely to face downward pressure on their margins. If margin pressure persists, we could see some consolidation in livestock, other agri-food, and biofuel," said Miller.
Outlook for Agricultural Stocks
Mr. Coxe noted that the share prices of big agricultural companies - farm machinery, seed, fertilizer and farm technology - seem to be attracting little attention.
Until the drought hit, agricultural companies' shares were good performers, because their profits were so reliably strong, partly driven by demand for food in third world countries.
"Stock prices for agricultural companies have not increased because there may be concerns that farmers won't have the money to buy seeds and fertilizer, or a new tractor. In fact, Canadian fertilizer companies will perform. It's safe to say that whatever farmers don't buy in fertilizers this year because they are strapped for cash, they will buy next spring," said Mr. Coxe.
In the corn and soybean sectors, the overwhelming majority of Midwest farmers carry crop insurance, with 60 per cent of the cost subsidized by the U.S. government. According to Mr. Coxe, that equals up to 85 per cent of what a farmer would have earned by selling crops at the price in September, based on the average yield per acre achieved in recent years.
Mr. Coxe noted that the Midwest drought may not be the biggest crop challenge this year. "The Indian monsoon left nearly 700 million people without power last week. If the monsoon continues, the cost of food for almost everyone on earth will climb dramatically -- and it would take at least two years of bumper crops in all the world's major grain regions to refill the granaries."
BMO - Agriculture Background
BMO's roots in the Canadian agricultural sector date back to 1817, when it first began working with farmers. The second-largest Ag-Lending bank in Canada, BMO Bank of Montreal provides customized loan and deposit solutions to Canada's agri-business owners, the single largest core commercial sector that the bank serves.
BMO Harris Bank is one of the 10 largest Ag-Lending banks in the United States, and the largest in Wisconsin. BMO Harris Bank brings a tremendous amount of expertise in serving Ag customers; it added new customers this year, increased its overall customer base and plans on continuing to grow its business and serve Ag customers.