Most significant risk for the agriculture sector in 2015? Demand!
I spent a lot of time lately thinking about 2015, while on our FCC 2015 Ag Outlook tour.
Many agricultural economic drivers are currently quite favourable. Oil prices continue to head lower. The Canadian dollar is at the lowest level of the last five years and interest rates have been low for an extended period of time.
Profit margins are significantly higher than average in the livestock sector. Yes, profits are tighter for the grain and oilseed sector, but the market seems to be carving out a bottom.
We’ll release our projections for 2015 soon – so stay tuned. But it’s no surprise that strong profitability is projected for the livestock sector. Next year's crops profitability will be driven by the size of the 2015 harvests, in Canada and elsewhere. But demand still appears strong for Canadian agricultural commodities. And that’s a reason to be optimistic.
So what could go wrong in 2015? This is a question I’ve heard a lot. I truly believe everything rests on the strength of demand, at home and in emerging markets.
Oil – the great unknown
The current drop in oil prices is mostly supply driven. But oil prices falling much further below $60 a barrel, and staying that low for an extended period of time would suggest softening demand. And that softer demand could spill over to commodities other than oil.
In fact, we can use oil prices to gauge the health of the world economy which, frankly, warrants a careful gaze.
The uncertain global economy
European countries are fighting off deflation. Economic growth is anemic in Europe, but also in Japan. China’s economy is slowing down. An implosion of shadow banking in China or a significant decline in its real estate market would hurt Chinese consumers’ purchasing power.
None of these situations taken individually is reason to worry about the health of the agricultural sector. But a significant weakening of the world economy could be cause for concern given that supply of agricultural commodities is bound to increase - barring any significant weather disruptions.
So let’s keep an eye on oil prices. The current drop isn’t something for the agricultural sector to be overly worried about. Yet. But a further decline and prolonged period of low prices would be symptomatic of softer demand and thus weakness in the global economy. A sluggish environment for world economic growth would result in lower demand for agricultural commodities worldwide. And that’s the most significant risk we are facing in 2015.
JP Gervais, Chief Agriculture Economist