2021: Your FCC Economics year in review
Canadian agriculture and food sectors bore some scars from the first year of the pandemic but proved remarkably resilient overall. The intense recessionary pressures in March and April 2020 had generally receded by December 2020, the world was generally short on supplies, and strong demand for commodities continued to boost commodity prices. We had broadly anticipated that 2021 would be the end of uncertainty and disruptions. But one year later, it’s now clear our hope was premature. 2021 has been filled with no fewer than 3 COVID infection spikes, supply chain challenges and deflated hopes for an unfettered economic recovery. Here’s how the year panned out.
The year started with a taste of what was to come with a surprising USDA report indicating global crop supply had suffered more from poor weather than previously estimated. The shortfall worsened the already tight crop supplies of 2020, exacerbated further by strong demand. With the stage set for a year of tight stocks-to-use ratios for corn, soybeans, and wheat, hopes were high for excellent production volumes in 2021 to correct the supply-demand imbalance.
The surging beef and pork prices of 2020, in part due to supply disruptions from COVID closures, had returned to pre-pandemic levels by January 2021 although strong demand still supported good cut out prices. January Consumer Price Index (CPI) data showed year-over-year (YoY) food inflation in Canada was 1.5%, and overall prices were 1.4% higher YoY. Counting on an economic rebound arising from a quick and efficient vaccine rollout across the country, the Bank forecast Canadian GDP to recover from the 5.5% loss in 2020 to a gain of 4% in 2021.
The first USDA model-based projections of corn, soybeans and wheat total acreages showed gains not seen since 2016. Increased acres held promise for rectifying supply shortages, as did several forecasts of record 2021 production. But even with those boosts, preliminary forecasts pointed to tight stocks of corn, soybeans, and wheat for the next marketing year.
China had recently estimated 90% of their hog herd was restored, but actual pork prices and import levels didn’t back their claims. Strong demand for pork, partly from continuing exports to China, pushed hog futures to their highest level since July 2019; the lack of clarity obscured potential trends in the supply-demand balances in global meat, grains and oilseed markets.
January’s lackluster inflation was slowly dissipating. By March, Canadian inflation had risen to 2.2%, from 1.1% in February, in part due to global supply chain troubles. The world’s shipping containers had become scarce, with unloaded containers being shipped back to China to facilitate their booming exports. Then, in March, the giant container ship Ever Given forever gave the world a million memes, clogging the canal and halting all marine traffic. The lack of transportation only added to worries about growing inflationary pressures. Recent growth in bond yields, driven by the perceived prospect of inflation, was evidence.
With continued strong global demand for crops expected, and echoing the initial USDA projections, the first estimates of Canadian acreage indicated larger YoY planted areas, which alongside forecasts of a good 2021 harvest, would reduce strain on global and Canadian supplies.
In more good news, there was cautious optimism about economic growth. The continued success of the vaccine rollout and a full economic reopening in the second half of the year were within reach and, if realized, would bolster domestic consumption and growth in foreign demand, especially from the United States.
The BoC forecasted the economy to grow by 6.5% in 2021 – a major improvement from the 4% growth it had forecasted in January. Canadian inflation had grown from the previous month, but at least part of the 3.4% YoY inflation could be explained by the “base effect” – April 2021 was being compared to April 2020 when major global lockdowns had spurred deflation. Bond yields steadied in April 2021 after initial inflation fears had shifted them up, and those fears were waning.
But headwinds were gathering. Between January and April, the CAD gained about 5% versus the Euro and about 1.5% against the USD thanks to rising oil prices – always a warning to exporters. And congestion at North American ports was exacerbating supply chain problems and increasing shipping costs.
The Canada-US exchange rate jumped above US$0.81 for the first time since early 2018, spurred by the economic recovery and an oil price at roughly US$65/barrel. Recent announcements from both the Federal Reserve and the BoC suggested the loonie wasn’t done either. Nonetheless, prices rose 3.6% between May 2020 and May 2021. But, when food and energy were excluded, inflation was at 2.4% and within the BoC target.
StatsCan’s survey-based report on 2021 plantings echoed the March 31 USDA report. The market’s expected YoY increases in plantings (given high crop prices) wouldn’t be met – and reduced acres didn’t bode well for the supply-demand imbalance. Producers had perhaps noticed an inversion of futures curves within a crop year, suggesting the current high prices wouldn’t necessarily be there in the fall. Expectations of a good harvest fuelled futures markets’ lower prices for the new crop.
We didn’t have COVID beat. The BoC reported the virus’ third wave had weakened an otherwise strong economic performance in the first quarter. There had been good growth in consumer spending, foreign demand and commodity prices. But downside risks lurked nearby, from the evolution of new COVID-19 variants and inflation, which was still above the 3% upper limit of the BoC target range.
By mid-year, heifers represented a greater share of fed cattle slaughter, completely reversing the trend at the end of 2020. It could merely have resulted from the cattle backlog COVID shutdowns had produced in 2020. Nonetheless, it hinted at a problem. If producers were downsizing herds with persistent heifer slaughter because of exorbitant feed costs, it could spell hardship down the road if continued.
Strong revenues and high prices in the first half of 2021 supported YoY growth of Canada’s grain, oilseed and pulse cash receipts. But what had once been very dry conditions in the West were becoming a full-blown drought, deflating expectations of fourth-quarter receipts. Producers were also taking a hit on expenses. In the first quarter of 2021, fertilizer prices jumped 9.7%, and the animal production input price index rose 9.8%, driven by a 21.2% increase in feed costs.
Farm inputs weren’t the only commodities with rising prices. Because of higher gasoline prices and ongoing supply bottlenecks, the BoC estimated inflation would likely remain above 3% for the rest of 2021. Inflation fears existed in the U.S. too, where rising oil prices and the U.S. economy’s performance was strengthening the U.S. dollar. The result? More than half the loonie’s 5%+ gain against the greenback between January and May had, since June, been erased.
The drought was deepening, hitting livestock producers particularly hard. Feed prices, high for about a year, were still rising. As feed availability became a larger issue, negative margins forced producers to sell cattle early to limit their losses – a development that could lead to lower prices. Multiple provinces and the federal government announced financial support for livestock producers through AgriRecovery.
The drought and high feed prices pushed cattle exports to their lowest in 15 years. The Canadian herd was getting smaller, the U.S. herd was growing, and Canadian packers were operating near full capacity. And big losses in global crop production were taking shape. Global wheat production was forecasted to be down 7.5 million metric tonnes YoY. In Canada, expected yields were down for all Western crops and Eastern soybeans YoY, with canola production expected at its lowest level since 2012. It held ominous ramifications for the available supply of Canadian grains, oilseeds, and pulses for the next marketing year.
Canadian producer profitability was top-of-mind. Many Western crops had matured early, prompting an early harvest, but new FCC cash receipts forecasts based on StatsCan’s September crop yield estimates were lowered 9.2%. Hurricane Ida’s damage to Louisiana production facilities and high natural gas prices were ballooning fertilizer prices. In some cases, they were now above prices observed during the 2008 economic crisis.
As COVID-19 cases rose across the country in the fourth wave, economists expected StatsCan to report +0.5% quarter-over-quarter (QoQ) growth in Q2; they reported a -0.3% drop. They also reported inflation for all items rose 4.1%, while food inflation rose 2.7%. The price of gasoline was up 32.5%.
There was no resolution to the problem of outsized demand. The drought had decimated yields in the Western U.S. and Canada, worsening prospects for both Canadian and global supplies of major field crops. Farm input prices had grown 8.3% QoQ in Q2 2021 due to COVID-led and other disruptions, helping produce 14.2% inflation for all Canadian manufacturing. October 2021 YoY gas prices rose 41.7%, and energy prices rose 25.5%.
General inflation on an annual basis hit 4.7%. Higher global energy prices pressured the dollar up. Natural gas and coal prices had reached record highs in Europe and Asia, and the price of oil had just reached levels not seen in years.
Flooding and mudslides in B.C. mid-November worsened supply disruptions. They severely damaged infrastructure in Lower Mainland and on Vancouver Island, reducing the flow of goods through the Port of Vancouver and adding to inflationary concerns.
The year’s high feed prices showed up as factors in two livestock sectors. Weekly cattle auction volumes had been above the 5-year average in all weeks but one since July, as producers culled herds to minimize feed costs. However, data showed Western Canada cow slaughter volumes were 0.7% below the 5-year average; cattle prices were generally higher than 2020 prices. And the Canadian Dairy Commission announced a higher support price for butter, effective February 1, 2022, in response to feed costs.
And that's a wrap
The blind optimism we started the year with has given way to resignation. As threats of a fifth wave emerge in December, it’s obvious good vaccine uptake in rich countries isn’t enough to master COVID-19. And many other problems we started the year with have persisted throughout 2021: supply chain woes exacerbating key sectoral supply shortages and enormous demand overwhelming available supplies chief among them. Those well-worn problems have been adjoined by rapid inflation in the U.S. and Canada, including untenable increases in food, feed and input costs. And a possible hike in the BoC key policy rate in 2022, while good for inflation, also might spell higher interest expenses for borrowers.
Still, good signs abound. Multiple shipping cost indicators are starting to retreat from the highs reached earlier this year. The loonie is projected to average US$0.795 for 2022, a level supporting our competitiveness. A significant cow cull has not occurred, and cattle prices are expected to stay above 2020 prices for the rest of this year. Crop input price gains will start to subside in 2022 and forecasted South American production could alleviate supply pressures on major crops. More importantly, the demand for commodities and food appears robust. There’s well-founded hope for 2022.
For more insights on inflation, supply chain stressors, food sector employment challenges, supply shortages and meat demand, watch for our January 12th post with our picks for the best charts to monitor in 2022. On behalf of the Economics team, Merry Christmas and Happy New Year to all!
Martha is a Research Specialist with a focus on economic performance and success factors for agricultural producers and agri-businesses. Martha has 20 years’ experience conducting and communicating quantitative and qualitative research results to a number of different audiences. She holds a Master of Sociology degree from Queen’s University in Kingston, Ontario.