Farm revenues should rise in 2023, but so will costs

Food price inflation and labour market volatility remain the post-pandemic factors to watch, Farm Credit Canada finance specialists said during the agency’s annual economic outlook Jan. 24.

Although challenges like supply chain disruptions and fluctuating input costs have eased somewhat, they will likely have an effect on farm costs and profitability in 2023.

Held the day before the Bank of Canada announced what may be its final interest rate hike for the time being, the FCC Economic Outlook focused on how Canadian agriculture could fare under a predicted global slowdown.

Why it matters: The federal lender provides a yearly economic outlook to inform Canadian farmers and agribusinesses on factors that may affect operations in the coming year.

The outlook was virtually hosted in a Montreal studio by FCC Industry Relations Manager Darlene McBain and featured commentaries from corporate headquarters as well as regional offices.

McBain started with good news: FCC estimates farm cash receipts were up 14.1 per cent in Canada for 2021-22 over the previous year, and projects another 4.6 per cent increase for 2022-23.

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“In short, revenues are up,” she said. The not-so-good news, however, is that “so are costs.”

Among the businesses FCC deals with, those struggling most with cost increases are those facing post-pandemic supply chain and labour disruptions.

FCC Chief Economist J.P. Gervais said “supply chains, overall, are getting back to some sense of normal” but acknowledged there is still upheaval in ag-sector supply chains.

Labour will also be a key area to watch in 2023. If the labour market tightens, farm businesses could be able to hire and maintain good employees. But if it continues as it has, wages could rise, putting pressure on profitability, he said.

Mark Van Vliet, a senior FCC relationship manager in Ontario, said automation is one strategy to overcome labour challenges but it goes beyond the cost of machines. There’s associated infrastructure, including additional space and buildings, upgrades to water and electricity service or other accessories.

Other labour strategies cited by FCC representatives include relocating facilities closer to public transit routes, implementing four-day work weeks so employees can trim commuting costs, employee buy-in programs, eliminating the waiting period for employee benefits, and an incentive-based internal referral program for potential new hires.

FCC Principal Economist Desmond Sobool predicted food processors will also continue to struggle with labour market challenges, even though there are growth opportunities due to rising domestic demand linked to immigration and a rising birth rate.

However, demand growth will be limited by inflation, he said. Sales will increase but not as much as in recent years. Sobool said some consumers are switching from higher-priced products to generic versions.

“I’ve even heard that some consumers are going to choose to consume less food.”

Higher food prices can pale in comparison to the increase in costs of production experienced by Canadian farmers in 2022. There was a “dramatic” increase in expenses for grain and oilseed production in 2022, Sobool said, with unprecedented increases in fertilizer and fuel.

FCC predicts continued increases in 2023, although the rate will be significantly lower.

It projects a five per cent increase in crop input expenses in Western Canada in 2023, and a 13 per cent increase for the corn-soybean-wheat dominated rotations in Ontario.

Grains and oilseeds

Sobool said 2022 was dominated by volatility in grain and oilseed trade due to weather, low global stocks-to-use ratios and the invasion of Ukraine.

“Food security became front and centre for a lot of countries,” translating into high returns for many Canadian farmers.

“Overall, 2023 is going to be a strong year … (with) strong revenues,” said Sobool.

Costs for fertilizer, fuel and other inputs are expected to remain high. Nonetheless, he expects “margins in 2023 that are going to be fairly high in both the West and eastern Canada.”

Hogs

Gervais said feed costs will remain the most relevant factor in the hog sector. Feed represented 60 per cent of the overall cost of hog production in Canada in 2021 but rose to 66 per cent in 2022.

He projects this will drop slightly to 64 per cent in 2023 but will remain a stress point.

Despite a United States Department of Agriculture projection of a slight decline in domestic hog production and a U.S. breeding stock inventory at its lowest point in five years, he believes there could be downward pressure on hog prices toward the end of 2023.

That’s because new numbers released by China suggest its 2022 production is higher than North American analysts thought.

“We do have to exercise a little bit of caution with numbers coming out of China,” said Gervais, but those numbers often prove accurate so “the question marks are definitely there.”

Beef

Prospects look better for beef in 2023, according to Sobool. With a third of the U.S. and parts of Canada dealing with drought, “there’s going to be a struggle to rebuild herds” in North America. Prices could also rise due to an apparent trend that consumers perceive beef as a more affordable protein.

“There’s some much-needed optimism in the beef sector, which we haven’t seen for a while.”

Dairy

Costs of dairy production in Canada were high in 2021 and even higher in 2022. This was “partially offset by a higher milk price,” Gervais noted.

“Producers have had to find efficiencies within their operations.”

FCC projects a significantly smaller increase in costs of production in 2023 compared to last year, covered by a rising base milk price.

Meanwhile, butter stocks are low and Gervais predicts pressure on the blend price from imports will be limited so producers can take advantage of component-pricing opportunities.

This could boost Canadian dairy revenues by five to six per cent.