If you had asked Richard Gray last month whether global grain supply would outstrip demand coming into this growing season, his answer would have been a resounding yes.
But now? It’s anyone’s guess.
“A few weeks ago, it would have been very clear that global production was going to exceed demand,” said Gray, a veteran agricultural economist at the University of Saskatchewan.
“But the situation is very fluid. There’s a whole lot of uncertainty right now.”
That uncertainty is being driven by two key factors, Gray said in a May 31 interview.
First, African swine fever has decimated Chinese hog numbers, with some estimates suggesting that between 40 and 60 per cent of the nation’s hog herd has already died from the deadly disease. In the end, the virus could wipe out most of China’s herd — which accounts for half of the total pork worldwide.
“Their herd is five times the size of the North American herd. So we’ve lost the equivalent of two or three times the North American herd already,” said Gray. “That’s a lot of animals that won’t be eating feed grains or soybeans.”
Reduced demand for feed grains could result in “very large excess stock in a hurry,” he added.
“I would argue that a lot of this sabre rattling with the tariffs on soybeans and the limits on Canadian canola exports really have a lot to do with China not really wanting more oilseeds at this point,” he said.
“If you slow up shipments in a period of declining prices, it means you can purchase at lower prices in the future. So I think that’s part of what’s going on with China.”
But in the last few weeks, global crop estimates have dropped as a result of weather woes including Australia, the Black Sea region, and particularly the United States.
“The corn crop and the soybean crop are both looking like they’ll have a significant reduction in acreage and a probable reduction in yield as well,” said Gray. “The U.S. is a large producer of both of those crops, so that’s good news — unless you’re an American farmer that’s been flooded.”
A drought-fuelled production drop on the Canadian Prairies would add to that supply program and help offset the steep decline in demand for feed grains.
“If these two big events hadn’t happened together, we would have seen radical changes in the markets,” said Gray. “If it had just been African swine fever, we would have been in a grain glut for a long time. If it had just been the U.S. corn crop failure, we would have seen quite a spike in grain prices.
“The worst-case scenario for Canadian farmers would be that swine fever takes all of the Chinese hog herd and the rest of the world grows a pretty good crop despite this lousy start to the season. So we’ll have to see how it plays out.”
But no matter how this growing season shakes out, the global agriculture industry is poised for an extended period of low prices, Gray predicted.
“The normal situation for a commodity market is long periods of low prices, followed by short periods of higher prices,” he said.
“The fact that we’ve had a decade of higher grain prices — that just hasn’t happened before. So we’re due for a period of supply catching up with demand.”
There’s a good reason why economists say the best cure for high prices is high prices, he added. As in the past, strong grain prices have encouraged farmers to increase production by spending on land, inputs, and equipment.
“After the industry increases its capacity, you’re left in an oversupply situation until demand catches up,” said Gray. “We’re at that point in the cycle after a long period of high prices. We should be getting to the point where we have ample supplies and lower prices.”
But since demand doesn’t surge the way production does, it takes a long time to get things back in balance, he added.
“Once you get some stocks built up, you need some bad years just to get them back to normal.”
That’s what happened during the grain glut of the 1980s and early 1990s — and like then, it could be ugly for many producers.
“A lot of farmers survived those periods of low prices before. But there were also a lot of farmers that went bankrupt, and others decided that they had to get out of the business,” said Gray.
“There are always farmers on the edge.”
Enchant-area farmer Lynn Jacobson remembers all too well what it was like to farm during those years of low prices.
“When I first started farming, we went through a grain glut where we weren’t very successful at marketing much grain at all,” said Jacobson.
“If it happens again, there will be some pain for a while. Prices already aren’t as strong as they were.”
Jacobson made it through that period, but others weren’t so lucky.
“Cash flow was hard,” he said. “The established farmers mostly just hunkered down and cut back on their expenses, and they survived. But they didn’t have the cash to spend on new equipment or technology.
“But there were a lot of younger farmers that had bought land at fairly high prices at the start of the 80s, and they lost that land. They couldn’t pay for it.”
Prairie farmers today could face that same prospect.
“Times have changed, and people adapt, but there is a danger that there could be a recession in the farm economy if it continues on too long,” said Jacobson. “We’re going to have to weather the storm.”
That starts with an effective risk management plan and marketing strategy, he added.
“We might need to reassess our marketing strategies going forward and not count on certain countries picking up our excess production.”
“Farmers will need to lower their expectations and be less aggressive,” he said.
“If there are good prices and they can make money with $10 canola, maybe they should price it instead of hoping that prices will hit $12.
“Ultimately, farmers will just need to be more conservative — they’ll need to sharpen their pencils and tighten their belts.”