The North American F&A Sector Moving to the 2020s
Farm economics, consumer trends, macroeconomics, and policy will be the major forces reshaping the North American food & agribusiness sector as we move towards 2020.
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The objective of this paper is to introduce some our long-term views for the next three to five years that include:
- In 2017/18, U.S. row crop farmers have a 75 percent probability that returns will be less than total debt. Due to contraction in production area and steady demand, 2019/20 is projected to have a greater than 50 percent probability of returning profits greater than interest expenses. After 2018 and beyond, we anticipate a lower cost structure, particularly in land values.
- Mexican and Canadian feed prices continue on the upside as a result of FX effects adding pressure to end users, including animal protein. Producers without access to the export markets show lower margins, increasing the possibility of consolidation, particularly in the Mexican beef and pork sectors.
- Farm equipment manufacturers will continue to see a slowdown in the U.S. until farm income recovers to the point at which buyers can take on incremental debt. We expect a modest rebound to begin in 2018.
- The U.S. animal protein sector grew significantly in 2016, and it is expected to expand again in 2017. As a result, margins are expected to tighten by 2018. Consequently, during 2019 and 2020, production is expected to grow marginally. The challenge for the U.S. industry is to remain competitive while meeting changes in consumer preferences. The Mexican meat sector continues to grow and has the potential to rebound in 2017, but all depends on exports, domestic consumption, and biosecurity. For Canada, everything is about policy.
- The U.S. and Canadian dairy industry is seeing continued competition from non-dairy and plant-based alternatives. In order for the dairy industry itself to remain at the forefront of everyday nutrition, it needs to prove it is a sustainable source of nutrition. Mexico will follow this path.
- Declines in core carbonated soft drinks (CSD) volume will continue to press non-alcoholic performance in North America. Opportunities for growth will come in adjacent categories, especially coffee/energy; plant-based, value-added water; and even probiotics that play to key consumer trends.
- In 2017 and 2018, we anticipate changes in U.S. policy, including the 2018 U.S. Farm bill. Restrictions on NAFTA trade and migration could be the main disrupters of the F&A sector in the region.
- Consumers continue to reshape the food industry, as is the case for animal protein, dairy, the beverage industry, and even sugar.
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