Disease, Drought and War – A Time of Volatility

Anyone who tells you they know where commodity prices will be in six months is either misleading or failing to grasp reality. We are at a time when contradictory pressures on supply and demand combine with political upheaval. As a result, farmers can expect an extended period of volatility in the prices they receive for the food they produce and the cost of the inputs needed to deliver that food to consumers’ tables.

How did we get to this uncertain place? We can start with the COVID-19 pandemic. The pandemic has caused disruptions in international shipping. Labor shortages, which were emerging before the pandemic, have become acute. Government policies, such as vaccination mandates for international truckers, have exacerbated labor shortages and logistical issues. Our supply chain has become more fragile. What was an efficient “just in time” international logistics system has become “just in case”, with each link in the value chain having to plan for additional shipping times and increased inventory. Shipping costs have increased. Uncertainty has increased. That’s not going to change any time soon.

On the positive side, Canadian agricultural value chains have proven resilient throughout the pandemic. The production and transformation capacity has been flexed but has not broken. We continue to deliver on our promise of safe, high-quality food for Canadians and consumers around the world. It’s a competitive advantage.

COVID-19 is just one of the diseases influencing international supply and demand. African swine fever (ASF) has devastated pork production in Asia, particularly in China and the Philippines, two countries that are major destinations for Canadian pork. This has helped support pork prices in Canada. But how long will this last? What is the state of Chinese pig production today? Europe has also been affected by outbreaks of African swine fever. What impact will this have on their production and export volumes? How far will African swine fever spread? These questions are difficult if not impossible to answer. ASF has caused, and will continue to cause, significant uncertainty and volatility in the markets.

There was widespread drought across the Great Plains of North America in 2021. For cattle ranchers, that means animal feed has been hard to come by. Many operations that were traditionally self-sufficient have been faced with the decision to buy feed or exit the industry. Producer margins have been squeezed by soaring feed costs. Before the fall of 2021, most people would have laughed at the idea that feed wheat would cost more than $10 a bushel, but here we are. Will North American agricultural production levels recover in 2022? How will reduced Black Sea supply affect feed prices? Again, we are uncertain.

Which brings us to the third major contributor to market uncertainty: war. Over the past 20 years, the Black Sea region has become a key contributor to international agricultural markets. For example, before the Russian invasion, Ukraine accounted for 16% of world corn exports and 12% of world wheat exports. The reduction in these supplies has already sent feed grain prices skyrocketing. What happens if supplies from the Black Sea stop completely? What impact will the war in Ukraine have on major European pork producers, such as the Netherlands and Spain, who depend on the region for food?

In addition, the region is also a key supplier of fertilizers. Continued disruptions to key agricultural inputs will impact global agricultural production. The extent to which changes in input supply will impact crop growers, and how long this impact will be felt, is unknown. The impact on global supplies and the cost of soybean meal, corn and feed wheat is also unknown.

How should agriculture respond to uncertainty and volatility? Risk management tools become much more important when market uncertainty leads to increased volatility. Manitoba hog producers operate modern businesses. They use risk management tools such as futures contracts for their hogs and feed hedging. However, we can do more to mitigate the growing risks that growers have no control over. First, governments must reform the current suite of business risk management programs so that they respond to the risks farmers face today. The hog industry isn’t alone in calling for changes to AgriStability or access to affordable livestock insurance programs. Second, industry and governments should seek ways to improve market and price transparency to enable better risk assessment. It can, and should, be a collaborative effort that includes all parts of the value chain.

Manitoba Pork just held its 57th Annual General Meeting. With all the uncertainty facing the producers, one might have expected pessimism to be the overriding emotion at the event, but that wasn’t the case. Farmers are optimistic that our pork will continue to be in growing demand in world markets. Most are looking for ways to grow the sector here in Manitoba, both in production and processing. This attitude largely explains the resilience the value chain has shown through the COVID-19 pandemic, and is a predictor of how we will weather the uncertain days ahead.

About Chris McCarter

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