FCC Chief Ag Economist's 2017 year in review
If I had to sum up 2017, I’d say, “Hurry up and wait.”
It was a year of endings (think of the period with no interest rate hikes) that will produce a difference in 2018 and beyond. But it was also a year of new beginnings (think of the Barton Report and the growing presence of young Canadian farmers).
Much of what happened in 2017 that was newsy didn’t have immediate clout, but many of its big-ticket items will have long-term impacts on Canadian agriculture. So, as it winds down, I’m taking a look at the year that was.
January: Ag Economics’ projections - 2017 report card
This month’s entry didn’t influence Canadian agriculture at all. But in the interest of transparency, we could look back to the projections we made in January for energy prices, the loonie and interest rates. And, maybe, boast a little.
Hit: We said oil prices would average $US50, and Alberta’s gasoline and diesel prices would average $0.86 per litre and $0.88 per litre, respectively. Good forecasts!
Miss: We projected the loonie to average US$0.75 throughout 2017; the actual average turned out to be US$0.77. Our bad—we didn’t see coming the two hikes to the Bank of Canada key interest rate. The low inflationary figures fooled us all into thinking that the Bank wouldn’t be able to tighten policy the way it did in 2017.
Impact: Sadly, none.
February: Barton report calls Canada an agri-food powerhouse
The Advisory Council on Economic Growth identified “agriculture and food” as one of eight key areas of future growth in Canada. That was some impressive acknowledgement of the work the industry has done to make food manufacturing a shining star in the overall Canadian economy. Its GDP growth of more than 5% in 2017 easily outpaced overall 3% manufacturing growth.
The report was influential enough to have landed the sector a spot in the 2017 federal budget, which set targets in 2025 to have grown Canada's agri-food exports from $55 billion in 2015 to at least $75 billion. There are significant dollars set aside to achieve this.
Impact: Still to come, but it will be formative
March: Comprehensive Economic and Trade Agreement (CETA)
Too much big news in February (so I’m cheating for March’s news).
In February, the European parliament approved CETA in the first step towards preliminary implementation (which happened in September). Several individual EU member states quickly approved the agreement, and Canada followed suit in May.
This will be an important step in Canada’s efforts to diversify export markets beyond the U.S. and Europe is a great place to start.
It’s traditionally Canada’s fourth largest agriculture and agri-food export market. CETA can potentially lead to an additional billion dollars of exports annually for the red meat sector as well as greater market access for grains and oilseeds. In return, EU cheese exporters gain greater access to the Canadian market.
Impact: One billion dollars
April: 2016 farmland values’ rate of growth decreased again
Canadian farmland values grew again in 2016, but its year-over-year rate of growth slowed—for the third consecutive year.
Increases in farmland values are typically supported by the combination of strong farm cash receipts and low interest rates: Canadian crop receipts climbed 3.1% in 2016 while interest rates continued to trend downward. Crop receipts may decline slightly in 2017. That, along with 2017’s increases to interest rates, may slow the rate of farmland values even more.
Impact: Smaller increases will keep farmland values in line with farm income, contributing to market stability.
May: New Ag Census shows slower decline in number of farms, young operators up
The total number of farms in Canada declined between 2011 and 2016, but at a pace slower than each of the previous four 5-year periods. Farm operators are aging, but young producers made up a greater share of the farm population in 2016 than in 2011. Technology and scale economies have led to farm consolidation—but new consumer food preferences have resulted in a greater number of smaller farms focusing on supplying value-added food products.
Impact: 3 words. Opportunity. Opportunity. Opportunity.
June: Food retail prices show little inflation
An interesting story throughout 2017 has been the evolution of food retail prices. Many food products recorded a retail price decline over the last 12 months: fresh and frozen meat (-0.8%), dairy products (-0.8%), fresh fruits (-0.4%). Overall annual inflation registered 1.4% while prices of food purchased from stores climbed a relatively low 0.6%. Lower prices certainly contributed to the strong appetite of consumers for Canadian food products.
Impact: See May.
July: Canada sees first interest rate hike since 2010
The Bank of Canada raised its benchmark interest rate twice in 2017: on July 12th and September 6th. The Canadian economy recorded a strong performance in the first 6 months of the year with Q1 and Q2 GDP annualized growth rates of 0.91% and 1.05%, suggesting the oil price decline of 2015 and the resulting decline in business investment is now mostly behind us.
Impact: A higher interest rate environment implies a focus on financial risk management.
August: NAFTA renegotiations get underway
This was arguably the biggest economic story of 2017.
The U.S. government initiated talks to adjust the terms of NAFTA, suggesting it may even withdraw from the agreement if a compromise isn’t reached. The U.S. has long been Canada’s single largest trading partner, with 31% of agriculture exports (23% of crop exports and 86% of animal exports) going south of the border in 2016. The U.S. is also an important destination for Canadian food and beverage products, accounting for 74% of all exports in 2016. But, with no conclusions to report at this time, we’ll have to wait to write the final chapter.
Impact: Hurry up and wait.
September: The loonie shows some bounce
The Canadian dollar reached US$0.82 in September, its highest point in 2017. The upward pattern in the loonie began in May when the CAD traded for $US0.72. It climbed steadily as interest rates in Canada moved up. It didn’t strengthen enough to cause problems in 2017, but a low Canadian dollar certainly supports profit margins in many ag sectors more easily than a stronger loonie.
Impact: A strengthening loonie could challenge profitability in 2018.
October: U.S. economy races; the Fed shrinks its balance sheet
In October 2017, the U.S. Federal Reserve reversed their policy of quantitative easing. The policy reversal will gradually shrink a balance sheet estimated at US$4.5 trillion of assets, one of the last remnants of the 2008 financial crisis in the U.S. In 2008, the Fed had injected monetary stimulus and quickened economic recovery by lowering interest rates with quantitative easing.
While it may possibly raise long-term interest rates in the U.S., the registered 3% growth in the U.S. economy suggests they can weather the challenge.
Impact: U.S. strength is great for Canadian exports.
November: India applies a 50% tariff to Canadian exports of yellow peas
India’s tariff was intended to support their domestic prices, after a large crop in 2016/17 and estimates of an equally large crop in 2017/18. The market impact was swift: prices for Canadian peas and other pulse crops tumbled. And the Indian government followed through with a tariff on lentils and chickpeas in December. While long-term demand for plant-based proteins remains extremely healthy, Canada’s 2018 acres for pulses are likely to decline. It could also play into the feed markets for Canadian livestock in 2018.
Impact: Far-reaching, into both crop and livestock sectors.
December: Bitcoin soars to a record high!
Ok. I don’t really think this is one of the most important trends of 2017. Count me among those who see bitcoin as a speculative asset, not as reliable currency.
The fact is: currency must be stable. Traders won’t use anything volatile as a medium of exchange. So, while the technology behind crypto-currencies is sound and promising, the search for a different and reliable currency is still on.
Impact: Zero. But it’s fun to think about.
Curious about 2018’s top economic trends in Canadian agriculture? We outline five of them, starting January 2. Guess what we see for the year ahead—or just check back with us for the whole series. And, no. Bitcoin won’t be one of them.
J.P. is the Vice-President and Chief Agricultural Economist at Farm Credit Canada. Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval. J.P. is Past-President of the Canadian Agricultural Economics Society. He obtained his Ph.D. in economics from Iowa State University in 1999.