WESTERN PRODUCER– Farm Credit Canada predicts a bit of a rocky road ahead for Canadian farmers, with input prices high, commodity prices low and interest rates not expected to drop in the short term.
“The sentiment of the industry is not the greatest right now,” said Desmond Sobool, FCC’s director of economics and deputy chief economist, speaking at the Canadian Crops Conference in Winnipeg in early March. “The good news is that the long-term sentiment is positive.”
According to Sobool, everyone agrees that interest rates have peaked, but there is less consensus on when they’ll come down. On March 7, the Bank of Canada again decided to maintain its key lending rate at five percent.
Inflation is trending downward, though still stubbornly high, and the Bank of Canada’s policy is to keep inflation at two percent or less.
“Overall inflation has been trending down,” said Sobool. “It peaked at just over eight percent a year and a half ago and came in at 2.5 per cent in the most recent report in January.”
That’s what is known as “core inflation,” the year-over-year change with some of the volatile components, like fuel and food, removed.
“Inflation has been stuck in that three to four-and-a-half percent range for a year and a half. So that’s that underlying price pressure,” he said, adding that FCC doesn’t expect to see rates come down until July.
That means producers will likely be making only essential investments in the short term.
“Buying an air drill or adopting a technology that might help soil conservation or nutrient retention might be delayed because rates are so high,” said Sobool.
The roots of the current problem come from the financial crisis in 2008, when rates were dropped to prop up the economy.
“Then they never came back up, so we had 20 years of ultra-low rates.”
As a result, housing prices and all other real estate, including farmland, hit the stratosphere.
“We saw really strong growth in farmland values because money was cheap. You were wise to invest in an asset where the value of the asset is appreciating higher than what you’re paying in interest rates,” said Sobool.
Then interest rates rose to counter post-pandemic inflation.
By the end of 2023, about 40 percent of residential mortgages had been renewed at a higher rate. Once that shock moves its way through the system, volatility is expected to settle down. On the other hand, Sobool said most mortgages won’t be renewed at the higher rate until the end of 2026.
“There’s going to be a little pain before we get to this situation where rates are starting to normalize,” he said.
The economy is expected to sputter in Canada. After growth of just 1.1 percent in 2023, the Bank of Canada is forecasting the economy to grow at just 0.8 percent in 2024, while FCC predicts just 0.7 percent growth.
The labour market will remain tight for the near future, said Sobool, at about five percent. That will affect inflation and worker availability.
“We’re seeing the labour market is losing steam, but it’s just taking some time. So labour is still going to be hard to find.”
The Canadian dollar is suffering, Sobool noted. That’s bad news for those importing from the U.S., but for the export-reliant agriculture sectors, it makes Canadian ag products more attractive and worth more when Americans buy them.
It will also impact inflation, however.
“The dollar is going to trend higher throughout the year, but not a whole bunch,” Sobool said.
It may seem counter-intuitive that the dollar can strengthen while the economy is weak, he added, but the dynamic is more a function of U.S. dollar strength, considered a safe-haven currency in troubled times.
Fertilizer and fuel have come off the peak seen a year ago, but they’re coming down slowly, said Sobool. Meanwhile, commodity prices are flagging. Geopolitical considerations will also affect commodity prices and input costs in 2024.
Russia has become a major wheat exporter in recent years, and events there will affect global prices. As well, China looks to increase its oilseed production and become less reliant on imports from other countries.
Both Belarus and Russia are major players in the fertilizer market and affect input costs, Sobool said.
“We’re heading into 2024 with the weakest prices we’ve seen in the last couple of years. Canola is down 38 per cent. Wheat’s down just under 33 percent.”
FCC does not predict further significant commodity price reductions in the near future.
“For the rest of this year and into next year, prices are going sideways,” said Sobool.
