Top Economic Drivers of 2017: Global economy

The beginning of a new year marks a time of planning. The FCC Ag Economics team wants to help you put your best foot forward into 2017 with an in-depth look at the top five economic drivers affecting Canadian agriculture this year. Check out the first post in this series and stay tuned over the following weeks as we dive into each driver in more detail.

2017 is shaping up to be a good year for Canadian agriculture. FCC Ag Economics expects profitability across the different sectors will be supported by a US$0.75 loonie, low borrowing costs and strong demand for commodities, amid rising farm input prices and some downward pressures on commodity prices. The International Monetary Fund projects that the global economy will grow 3.4% in 2017, resulting in strong food demand. Muddying the waters are questions around the impact of the U.S. new trade policies on the value of the USD against global currencies, including the CAD, and the health of the U.S. economy. What is clear however, is how important it will be for Canadian producers to monitor global trade relationships between the U.S. and notable trading economies, such as China. While this could spell opportunity for Canada, at the very least, it’s sure to shift balances. Because of the importance of trade to the success of Canadian agriculture, the global economy is the last, though hardly the least of the five trends to watch in the coming year.

For more on the other drivers we believe will impact Canadian agriculture, check out our other posts in this series covering the Canadian dollar, energy prices, commodity prices and the interest rates.

What can Canadian ag expect from the global economy in 2017?

Big news in 2017 will be the evolution of China and the U.S. as dance partners. That this dance will change tempo is certain; what the tempo will be is unclear.

Given the size of the two economies and their presence in ag trade, any change should impact commodity prices. China imported 63% of world soy trade in 2015; 36% of that came from the U.S. A slowdown of U.S.-China trade relations could have a range of different impacts, one of which is that it could open the Chinese market for other suppliers to fill. For example, a sudden and large cut in U.S. imports of Chinese goods however could also produce a slowdown in overall Chinese growth, curtailing one of the world’s largest ag markets.

Despite the overtones of slowing global trade in 2016, global demand for agriculture commodities and agri-food products should continue to stay strong. The likely impacts to Canadian agriculture from the evolving global economy we can expect will come primarily from the U.S. and the course for global trade the new U.S. administration charts through its first year in office.

A cut in trade from the U.S. will have ripple effects throughout world markets and certainly here in Canada. If economic logic prevails, our trade relationship with the U.S. will not change much, given the integration and interdependencies of the two economies. Key areas to monitor include:

  • Canadian cattle and hog exports to the U.S. totalled CA$2.2 billion and 99.7% of all exports in 2015. Both countries’ supply chains are highly integrated and benefit from smooth trading rules.
  • Currently, about 40% of the U.S. corn supply goes to ethanol markets; any change in the U.S. ethanol policy would disrupt the balance of supply and demand and impact corn prices and other commodity markets. Our expectation? If the policy is changed, it wouldn’t be immediate, and would need to be legislated – not an easy feat.

What’s the bottom line?

Generally, any change in trade policies that will strengthen the USD will keep the CAD lower. That will be good for Canadian exports and good for prices Canadian producers receive for commodities priced in USD.