3 things to watch now that the U.S. Federal Reserve held its key interest rate unchanged

FCC Economic Update

Highlights

  • Canadian agricultural producers benefit from a lower loonie as it increases the price producers receive for commodities that are priced in U.S. dollars such as wheat, soybeans and corn.
  • Innovation, productivity, and capacity are more important features to keep in mind than the relative value of the Canadian dollar.
  • We must also keep an eye on other export markets than the U.S.
  • The current uncertainty surrounding the world economy played a part in the decision of U.S. officials to delay their rate hike.

U.S. Federal Reserve officials left their key interest rate unchanged at the end of a much anticipated meeting in September. Their official statement opened the door for a rate hike to occur at their next meeting scheduled in December. This would be the first increase since their key interest rate has been pegged at a rock-bottom 0.25 per cent since 2008. Canadian producers compete in global markets that are truly influenced by financial variables and overall economic conditions.

What are the economic factors that Canadian producers need to watch over the next three months?

Loonie remaining weak

The Canadian dollar now stands at around 76 cents per U.S. dollar, following a slide that started out in 2013, and accelerated with the steep fall in oil prices at the end of 2014. While the role of the downward spiral in oil prices on the weakness of the loonie cannot be denied, we must not forget that the spread between interest rates in the U.S. and Canada does have an impact on the value of the Canadian dollar. The U.S. Federal announcement in September was met with a slight appreciation of the Canadian dollar given it was roughly in line with the expectations of the financial markets.

"A solid marketing plan is the greatest tool to navigate the uncertain world economic environment. It is especially important that producers develop one as we begin the post-harvest season."

All eyes are now on the U.S. Federal Reserve December meeting. The odds of a rate hike are pretty even at the moment. No matter if the first rate hike occurs in December or sometime in 2016, the Canadian dollar should be pressured downward over the course of the next three months. It seems clear that higher interest rates will occur in the U.S. before it happens in Canada.

Canadian agricultural producers benefit from a lower loonie as it increases the price producers receive for commodities that are priced in U.S. dollars such as wheat, soybeans and corn. The strength in the world supplies of grains and oilseeds will determine the general trend in U.S. prices, but domestic Canadian prices should be supported by the weaker Canadian dollar, at least in the short term.

Strength of Canadian exports to the U.S. market

The Canadian agriculture and food manufacturing sectors rely on export markets. And the U.S. market accounted for 71 per cent of Canadian exports of food manufacturing products in 2014. A weaker Canadian dollar against the U.S. dollar makes Canadian products more affordable for U.S. buyers. It is therefore not surprising that Canadian exports of food products to the U.S. have trended higher for the first seven months of the year compared to the same period a year ago. For example, the value of Canadian exports of meat products to the U.S. are up 14.5 per cent. Exports of sugar and confectionary products are up 21 per cent.

The short-term boost to the competitive position of Canadian exporters induced by the weaker loonie is something we have seen before. Yet, the relative value of the Canadian dollar is not the most significant driver of exports over the long-run. Innovation, productivity, and capacity are more important features to keep in mind.

We must also keep an eye on other export markets than the U.S. Our exports of fresh, chilled and frozen pork meat are down 15 per cent in Japan year-to-date, and a surprising 38 per cent in China. The currency of our competitors has also lost value against the U.S. dollar – potentially impacting our competitiveness. In other words, all currencies matter.

World economic jitters

The current uncertainty surrounding the world economy played a part in the decision of U.S. officials to delay their rate hike. Focusing on China is key. A major decline in the Chinese swine herd should open up opportunities in the pork market. China after all accounts for more than 50 per cent of the world hog production. The Chinese market accounts for 65 per cent of all soybean trade in the world.

The economic outlook for China is murky. A number of questions are emerging around the validity of the data released to measure the strength of the Chinese economy. No matter where the true numbers stand, declining investment, slowing manufacturing activity and a burdensome debt level threaten to trigger a hard landing for the Chinese economy.

On the positive side, the housing market in China is showing signs of a rebound. And retail sales are still strong. The current uncertainty is perhaps something we will need to become accustomed to as China transitions to an economy more heavily focused on domestic consumer spending.

Uncertainty definitely seems to be a common theme in agricultural markets. A solid marketing plan is the greatest tool to navigate the uncertain world economic environment. It is especially important that producers develop one as we begin the post-harvest season.

J.P. Gervais, Chief Agricultural Economist

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