Top economic trends of 2018: Investment
As we head into the new year, the Ag Economics team wants to help you anticipate 2018 with a look at five economic trends likely to affect Canadian agri-food this year.
Investment is our fourth important trend to monitor in agri-food industry. Overall, we think the investment environment remains strong for the Canadian agribusiness and food processing sectors in 2018. A relatively low Canadian dollar improving global economy and evolving consumer food preferences should all contribute to spur investments in value-added activities across the agri-food supply chain.
There are also some headwinds: Borrowing costs are expected to climb in 2018 and access to foreign markets can appear uncertain and volatile.
Investment momentum strong entering 2018
The past few years have highlighted significant investment opportunities in food production and processing. Investments have ranged from building new inland grain terminals, expansion of port facilities and construction or food manufacturing plants to mergers and acquisitions led by Canadian companies within and beyond Canadian borders.
Growth in Canadian food manufacturing GDP has outpaced the overall economy for the past 4 years (2014 to 2017), highlighting the profit opportunities that the sector offers. This is certainly in line with the Advisory Council on Economic Growth recommendations, which called for targeted investments in Canada’s agriculture and food industry to support its global growth potential.
Canadian economy nearing its full potential output
The Canadian economy continues to grow. Businesses are facing more capacity constraints and unemployment is trending lower. As a consequence, the Bank of Canada lifted its overnight rate by 25 basis points, the third increase over the last 7 months. The financial markets expect two more rate hikes in 2018. This has supported the Canadian dollar above US$0.80. We believe that the loonie will dip lower in 2018 as the U.S. central bank also tightens monetary policy. And despite the Bank of Canada rate increase, borrowing costs remain low from an historical standpoint.
Increasing food demand generates investment opportunities
Demand for food continues to increase and evolve. In emerging market economies, rising incomes are creating more opportunities for Canadian exports as consumers are looking to either purchase more food or purchase higher value food. Economic expansion in developed economies is leading a switch to higher value and more diverse food products. Canada has a strong brand globally and is in a strong position to take advantage of these opportunities.
Trade opportunities abound, yet trade rules continue to be challenged. Import tariffs of Canadian exports of pulses to India illustrate the benefits of investments in processing across the supply chain. Investment in processing of plant-based proteins create opportunities for Canadian pulse producers at a time when the global market for pulse commodities shrinks.
Changing food preferences also drive investment decisions. Consumption of animal proteins and natural fats remains strong and is growing in some market segments. For example, milk production in Canada is trending upward, requiring investment in processing capacity. Canadian consumers also seek healthy and convenient food products. This is expected to trigger more investments in prepackaged, easy-to-prepare foods and likely lead to higher food spending away from home. Keep an eye on the release of an updated consumer food guide in 2018 as it can further shift the dietary preferences of Canadians. Automation in food processing plants is also expected to lead to more investments.
What's the bottom line?
The agriculture and agri-food industries offer plenty of investment opportunities. We expect the momentum to carry forward in 2018. Historically low borrowing costs, a favourable Canadian dollar, value-add opportunities and technology all point to increased investments in 2018.
Craig joined FCC in 2009 as an Agricultural Economist, specializing in monitoring and analyzing the macroeconomic environment, modelling industry health, and providing industry risk analysis. Prior to FCC, he worked in the livestock branch of the Saskatchewan Ministry of Agriculture. Craig holds a Master of Agricultural Economics degree from the University of Saskatchewan.
In this series
In the last of a five-part series examining the year ahead, we look at the evolution of technology in the food retail industry.
In this third of a five-part series examining the year ahead, we look at the role the energy markets will play in Canadian agri-food competitiveness.
In this second of a five-part series examining what lies in the year ahead, we look at the role farmland values will play in Canadian agri-food competitiveness.
In this first of a five-part series examining what lies in the year ahead, we look at the role the global economic landscape will play in Canadian agri-food competitiveness.