1. Agriculture faces little interest rate risk
The overall economic environment is expected to support farming operations, agribusinesses and food processors in 2016. Consider the following:
- Interest rates should remain low – with some slight upward pressure on fixed rates associated with 3-year and 5-year mortgages
- Continued weakness in oil prices and a different outlook for interest rates between Canada and the U.S. should lead the Canadian dollar to a new low against the USD. It’s expected to show strength in the second half of the year.
- Economic growth in China will slow as India’s economy gains speed. Both will sustain a strong demand for agricultural commodities
2. Fewer opportunities for profits as supplies grow
Global agriculture commodity prices are expected to head lower as global supply remains high or increases. Some good news: the low Canadian dollar will continue to provide support for Canadian producers. Here’s what you can expect in ag markets:
Grains and Oilseeds:
- High global stocks will put downward pressure on prices
- Margins will remain positive, but will be sensitive to movements in the Canadian dollar
- Lower feed costs will support livestock sector margins
- Lower beef prices will put downward pressure on cattle prices, tightening margins for feedlots
- Despite declining cattle prices, cow-calf margins should remain strong
- Hog sector margins should be in line with five-year averages and continue to benefit from China’s strong pork demand
- Imports of dairy ingredients and continued low world dairy prices will pressure dairy sector profits. Eastern Canada, with more of the industrial milk market, will be especially sensitive to this.
3. Canadian farm debt will continue to climb, but at a slower pace
Strong agriculture commodity prices over the past five years led to increased investment in Canadian agriculture. This helped boost the large gains in farmland values and farm equipment sales before 2015. In 2016, look for growth in farm debt to ease for two reasons:
- The rise in farmland values will slow as producers re-evaluate the earning potential based on weaker commodity prices
- Purchases of farm equipment will decline as producers make efficiency their number one goal. The lower Canadian dollar will compound this issue as farm inputs become more expensive.
4. Weather patterns could cause supply disruptions and opportunities
Weather is expected to create opportunities for Canadian producers in 2016:
- Droughts in Russia and Ukraine are expected to lower wheat production
- El Nino is expected to reduce palm production in Indonesia and Malaysia as well as pulse production in India. In fact, low carry-over stocks and strong demand for pulses will support prices - 2016 may truly be the “Year of the Pulse” for Canadian producers.
- The impacts to cereals and grains isn’t known; corn and soybean production in Brazil and Argentina will likely offset much of the reduced production elsewhere
5. Price conscious consumers demand more food diversity
Producers and food processors face increasing pressures to join the stampede in meeting complex demands for food with conflicting characteristics: fresh vs. processed, healthy vs. indulgent, local vs. global - but most of all, affordable. Canada has traditionally thrived producing agriculture commodities, but that may no longer suffice given:
- More world-wide demand for animal-based protein and processed products
- The search for solutions to address growing public concerns about modern food production – or the “” movement
- A mature domestic market demanding the food that’s deepened Canada’s trade deficit (from $1.9B in 2010 to $3.5B in 2014)
Some important trends that didn’t make the final cut:
- Ratification and implementation of trade agreements such as the and the
- The lack of available farm labour and the resulting upward pressure on farm wages
- Patterns of fertilizer prices
Despite their absence in our list of top five trends, each of these has the potential to impact future business plans.
Check back with us throughout 2016 as we review these key economic drivers of Canadian agriculture and agri-food. Understanding the trends is the first step on the path to capture opportunities.
J.P. Gervais, Chief Agricultural Economist