In keeping with Farm Credit Canada’s (FCC) commitment to providing timely and relevant economic analysis to the Canadian agriculture industry, FCC Chief Agricultural Economist J. P. Gervais shares five key economic issues in agriculture to watch in 2014.
“Canadian agriculture is a challenging and rewarding industry, filled with professional, forward-thinking, business-savvy people who love what they do,” Gervais says. “By building and sharing agriculture knowledge, producers benefit, agriculture benefits, rural Canada benefits and so do all Canadians.”
North American farmland values have been increasing rapidly over the past several years, but they could soon plateau, according to Gervais.
A record-setting harvest in 2013 for many grain and oilseed producers means
increased world supplies and prices retreating closer to their average, compared to above normal prices over the past few years. Reduced commodity prices could mean many producers will be less aggressive in expanding their operations, resulting in lower appreciation of land values.
“Many producers will be surveying the landscape to determine if they should buy more land or pay off some debt,” says Gervais. “A lot of their decisions will be based on commodity price forecasts, their current profit margin and how much they have invested in land in recent years.”
The tentative agreement between the European Union and Canada on the Comprehensive Economic Trade Agreement (CETA) may be generating the headlines, but Canada is also involved in negotiating other significant trade deals, including the Trans-Pacific Partnership (TPP).
Both trade deals represent a concerted effort by Canada to become less dependent on its main trading partner, the United States, which accounts for 30 per cent of our country’s agriculture exports and two-thirds of agri-food exports. Over-reliance on a single market makes the Canadian agriculture sector vulnerable to dramatic downturns in the U.S. economy.
CETA, once ratified, will open up a market of 500 million consumers for Canadian agriculture products, while TPP negotiations involve 12 countries, including New Zealand, Australia, Vietnam, Malaysia, Japan and the United States.
“Between those two agreements, every sector of Canadian agriculture will have opportunities and face some challenges,” says Gervais. “We need to start preparing to manage our business in a new environment.”
U.S. politics and economics
U.S. political infighting promises to create more uncertainty south of the border. The dispute resulted in a partial government shutdown this year and continues to pose a risk that the U.S. will default on its debt.
Gervais, however, predicts things will continue to improve south of the border. The U.S. Federal Reserve recently started scaling back its aggressive monetary policy because it is seeing strength in the labour market and household finances.
“Rolling back a program of this magnitude is sailing in uncharted waters,” Gervais says. “This change in the U.S. monetary direction can have wide impacts in the financial markets – mostly on the value of the emerging markets’ currencies – impacting the competitiveness of Canadian agricultural commodities.”
Disputes also distract U.S. legislators from coming up with a long-term plan for the Farm Bill, which funds many important programs aimed at providing farm support and nutrition assistance to low income families. Legislators recently passed a short-term extension of the 2008 Farm Bill and are confident a new farm bill will be enacted in early 2014.
“The lack of a five-year farm bill means the status quo for now,” Gervais says. “The Farm Bill indirectly impacts Canadian producers by influencing the crops planted in the US and therefore world prices.”
Canadian beef gets bullish
Canadian livestock producers – particularly beef producers – should expect healthy returns over the next couple of years, according to Gervais.
Stronger beef prices are the result of supply and demand dynamics. Cattle numbers have been declining for some years; a result of drought in the U.S. and financial conditions that forced many producers to reduce the size of their herd or leave the sector. The U.S. herd was reduced by five per cent over the past two years and will take a couple of years to recover, while the Canadian herd is stable and appears ready to rebound.
“In the short-term, Canadian producers are in a much better position to serve the North American market, which has seen an end to the decline in per capita red meat consumption. The demand for animal protein is growing in emerging markets, such as China,” Gervais said. “The European Union trade deal has the potential to give Canadian beef the advantage in other global markets, including Europe.”
Gervais says the U.S. Country of Origin Labeling (COOL) legislation has hurt Canadian cattle producers, especially since new rules were issued by the U.S. Department of Agriculture. The coming year will determine if the U.S. government backpedals or even takes apart this legislation, either voluntarily or through pressure from its trading partners.
Equipment sales gearing down
Like much of the rest of the agriculture economy, equipment sales were on fire for many of the past five years. From 2006 to 2012, an average of 2,100 tractors were sold every month in Canada, according the Association of Equipment Manufacturers. Sales are expected to be equally as strong for 2013 when the final numbers are tallied.
With slightly lower crop prices, 2014 could see a retreat in equipment sales. Sales are likely to move closer to the 2001-2005 average, when 1,540 tractors were sold monthly – lower than levels of the past several years. Another factor lowering sales could be a weaker Canadian dollar in 2014, which will make buying imported equipment more expensive.
“In the short-term, we will likely see equipment prices staying steady, but they could soften somewhat if supplies remain high and producers decide to retain their old equipment or buy used equipment,” Gervais says. “Broad economic factors may influence how producers use their past profits, but it really comes down to the unique circumstances of individual producers.”
By sharing agriculture economic knowledge and forecasts, FCC provides solid insights and expertise to help those in the business of agriculture achieve their goals. More information and insights on this topic can be found in the January 10 edition of the FCC Express.