Future of ag looking up despite weakening economic forecast

The latest Bank of Canada (BoC) Monetary Policy Report, released this past Wednesday, paints a cautionary picture of the economic landscape facing Canadians. It appears all things economic aren’t that bad… or at least as bad as they might have been.

Here are the report’s highlights with a note on the implications for Canadian producers.

A weakening forecast

  • The Canadian economy will improve, but will take time. Real GDP growth is projected to be 1.1 per cent in 2015 and 2 per cent in 2016.
  • Oil and energy exports continue to face price pressures as a result of excess global supply and ongoing production. Energy-sector provinces, hit the hardest since oil’s free fall, will grow more slowly as the sectors face continued drops in investment.
  • Inflation hovers in the 1.5 to 1.7 per cent range; the Bank expects its target of 2 per cent to be reached only later in 2017 when GDP growth resumes its normal pace.

Finding strength in weakness

Despite the weaknesses noted in the report, there’s room for optimism.

  • U.S. household spending continues to strengthen. The U.S. is Canada’s single largest export market, so this is very (very) good news.
  • Generally, emerging market economies are expected to regain some of the vigor lost in 2015.
  • The current turbulence in China may not be as troublesome as predicted for global markets as their food demand continues to strengthen
  • Interest rates remain low and stimulate growth.
  • A low Canadian dollar has helped export-dependent (non-resource) sectors.

The Monetary Policy Report's implications for ag

Agriculture commodity prices are – no surprise – expected to remain lower than the highs observed between 2010 and 2014. Agricultural production has been stronger than expected in many producing countries.

The strong USD is good for Canadian agriculture for three reasons: the stronger USD doesn’t seem to have had a significant negative impact on the purchasing power of buyers in ag markets. The commodities Canada exports are priced in USD and can lead to higher revenues for Canadian producers. Canada can also enjoy a better position in global markets with exports that are relatively more competitive against U.S. exports.

The Bank’s downward adjustment in Chinese economic projections (growth of just over 6 per cent in 2016 and 2017) is expected as China transitions to a consumption-based economy. And its overall growth continues to be among the world’s strongest – and, most important to agriculture, so does personal income growth. That’s a positive for global food demand.

Employment in sectors that typically provide competition for agriculture (mining, quarrying and oil and gas extraction industries) fell 9 per cent in the last 12 months, as did wages. This may ease pressure on Canadian farm operations in the year ahead to find and keep labour.

Coming soon: FCC Ag Economics: A 2015 Look at Global Trade examines the relative impact exchange rate fluctuations have had on Canadian export values of livestock, crops and manufactured food products.

Martha Roberts, Economic Research Specialist