It’s sometimes said (rather sarcastically) that economists are really good at explaining tomorrow what happened yesterday.
In early 2012, we provided a list of the top five economic drivers producers and agribusinesses should monitor. As the year draws to a close, it’s time to reflect on the impacts these drivers have had on net farm income and the profitability of the agri-food industry.
Global economic growth
Income growth in emerging markets remains one of the most important drivers of food demand and farm gate prices. Accordingly, we identified challenges to global economic growth as the top economic issue to monitor in 2012.
Unfortunately, the European sovereign debt crisis is still very much alive. Beyond the resulting slowdown of European economies, the crisis negatively impacted other countries, such as China, whose economic growth decelerated throughout the year. Fortunately, global demand for feed grains, cereals and meat remained strong throughout the year.
Changing policy environment
At the beginning of the year, we knew that the policy environment in Canadian agriculture would change, starting with the deregulation of the Canadian Wheat Board.
The resulting adjustments in the marketing of barley and wheat in Western Canada were some of the most important changes experienced by Canadian producers this year.
Outside of Canada, however, the policy environment remained mostly unchanged.
While the United States Farm Bill expired in October 2012, Congress and the President have yet to agree on a new set of farm policies for American producers. Trade negotiations between Canada and the European Union could be finalized in early 2013. And although Canada secured a seat in 2012 at the bargaining table to expand the Trans-Pacific Partnership, we could still be years away from a deal that would enhance Canada’s access to Pacific markets.
Production outlooks
We identified production conditions in South America and the Southwest U.S. as the third major issue to monitor.
We sensed that weather conditions in 2012 could play an important role, however, we did not anticipate the magnitude of the U.S. Midwest drought and its impact on agricultural markets in 2012 and throughout the next marketing year.
Over 60 per cent of the mainland U.S. faced drought conditions this past summer, generating the lowest projected corn yields since 1995. As a result, corn prices hit record highs in August and created tight profit margins in the livestock sector for the second half of 2012. World inventories of grains and oilseeds remain extremely low: total world production is estimated to be nearly four per cent lower in 2012-13 than last year.
Canadian dollar
The strong Canadian dollar was identified as the fourth important driver. World economic growth has been resilient, despite uncertainty. Oil prices remained strong, ranging from $78 to $109 US per barrel throughout the year. As a result, the Canadian dollar traded in a fairly narrow range of $0.97 US and $1.03 Cdn.
Be prepared for more of the same in the upcoming year. The high Canadian dollar continues to challenge agribusinesses to innovate and find productivity gains, in response to competitive pressures from U.S. and other foreign businesses.
Farm input prices
Farm input prices were starting to climb significantly towards the end of 2011 and we discussed the possibility of elevated fertilizer and energy prices throughout 2012.
Statistics Canada has revealed that farm input prices are five per cent higher than a year ago, slightly above the average annual rate of increase of four per cent.
The increase was driven largely by fertilizer costs (up 14 per cent) and feed costs (up 10 per cent). Prices for gasoline and diesel remained nearly unchanged from last year’s levels.
Producers should always be vigilant and monitor input costs, but high crop prices in 2012 more than offset increases in fertilizer prices.
In hindsight, many other issues could have made our list. Farmland values continued to increase throughout most of Canada because of strong crop receipts and low interest rates. Weather impacted foreign production regions as well as crops closer to home. Frost damage to Ontario’s fruit crops in the spring, summer drought in Eastern Ontario and wet spots in the Prairies all had a negative impact on crop receipts. A low unemployment rate in Western Canada also made it increasingly difficult for some businesses to find qualified labour, resulting in higher wages. Increasing household debt levels in Canada are a growing concern for the future strength of the Canadian economy, in light of continued world economic turmoil.
Stay tuned next month as we identify the top five economic drivers in 2013 for Canadian agriculture. The impacts of global economic drivers on Canadian producers and agribusinesses are difficult to anticipate. The old saying “think globally, act locally” is quite meaningful in this context. It’s important to stress test business strategies against different economic scenarios. Despite some challenges, 2013 is shaping up to be a rewarding year for producers and agribusinesses.