Mid-year check-in: Top 5 economic drivers of 2015

FCC Economic Update


  • The U.S. and China were expected to move in opposite directions in 2015.
  • Labour: Statistics for the first five months of 2015 show a decline in hired farm labour.
  • Food inflation has increased at a faster rate than a year earlier for the first five months of 2015.
  • So far this year, machinery sales indicate livestock equipment markets are steady, while field crop equipment sales are declining.

I provided our list of the top 5 economic drivers to watch at the beginning of the year. It is now time to look back at the last six months to understand how the business environment evolved, keeping an eye on what the next six months may bring.

U.S. Economic Outlook is Bright, China is Hardly Slowing Down
We projected that the two economic giants would be moving in opposite directions during the year. The U.S. economy hit a bump in the road in the first quarter of 2015 as U.S. Gross Domestic Product (GDP) retreated. Different reasons (weather, slow exports, etc.) explain this performance. But a number of indicators suggest that the underlying fundamentals are still strong. Job numbers continue to grow, with the economy creating approximately 250,000 jobs a month over the past twelve months. Consumer confidence is increasing as disposable income rises; creating opportunities.

"There are many more unknowns in the economic environment of producers, agribusinesses and food processors."

For example, the restaurant performance index of the U.S. National Restaurant Association suggests U.S. consumers have spent more on food over the last six months. Positive developments for Canadian food exporters. The U.S. central bank believes that the U.S. economy remains strong enough to withstand a hike in interest rates before the end of 2015.

The Bank of Canada now projects China’s GDP at 6.9 per cent, down from its previous estimate of 7.0 per cent. That’s a small retreat in the rate of growth. Yet Chinese demand for food is strong and growth opportunities exist for Canadian agri-food exports. 

Canadian Agriculture Labour Market is Expected to Remain Tight Despite Raising Wages
Statistics for the first five months of 2015 show a decline in hired farm labour. Year-to-date farm labour wages continue to increase at a faster rate (3.4 per cent) than wages in the general economy. While we anticipated the tight labour market at the beginning of the year, the extent of the increase in agricultural wages is surprising. Projections of lower business investment in the oil and gas sector could alleviate the upward pressures on farm wages over the next 6 months. 

Food Prices March Upward
We expected food prices to increase at a faster rate than the overall Consumer Price Index (CPI), yet at a more moderate pace than in 2014. In fact, food inflation has increased at a faster rate than a year earlier for the first five months of 2015, driven by large retail price increases for beef and pork. However, pork prices have started to increase at a lower rate as hog prices have declined from their highs in 2014.

The lower Canadian dollar has had an impact on grocery bills of Canadian consumers as imported U.S. produce becomes more expensive. The extended drought in California also has had an impact. Softer oil prices and upward movement in U.S. interest rates should keep the Canadian dollar at around US$0.80 for the rest of the year – a positive influence on farm revenues as many agricultural commodities are priced in U.S. dollars.

Divergence in Farm Equipment Sales
Year-to-date machinery sales indicate that markets for livestock equipment have been steady while field crop equipment sales are declining and approaching pre-2008 levels. This was expected as livestock receipts continue to remain strong while margins for crop producers have decreased from previous years.

The demand for new farm equipment was softer as retail prices moved upward with the rise of the U.S. dollar. It is expected that sales between field crop and livestock equipment will continue to move in different directions while the demand for used farm equipment will increase.

Soft Landing for Farmland Values
The 2014 FCC farmland values report released in April 2015 reported that the appreciation rate for farmland values slowed from that of the previous year. As expected, lower commodity prices triggered a smaller increase in 2014 farmland values across the country.

Interest rates are still projected to remain low throughout 2015 as the consensus is for the Bank of Canada to raise its key interest rate in 2016. Profit margins of grain and oilseed producers may continue to tighten throughout the year – perhaps being the most important driver of how farmland values will evolve over the remainder of the year. While overall crop receipts appear to soften, they are still above their long-term average throughout the country. The farmland market appears heading towards the soft landing scenario we have been projecting.

There are many more unknowns in the economic environment of producers, agri-businesses and food processors. We will highlight more specific indicators to watch in the month of August so you can determine what actions will drive efficiencies and productivity in your operations.    

JP Gervais, Chief Agricultural Economist

Did you know that we host learning events across Canada on topics just like this? Find an FCC event near you.