COVID-19 impacts to the economy and agri-food markets
Last week, we provided a first assessment of coronavirus impacts on the economy and markets. Governments around the world are taking steps to control the speed at which the virus spreads, but the economic impacts are only starting to materialize.
Proper risk management strategies start with understanding these economic trends:
Weaker economic growth
Necessary restrictions on the movement of people and workplace policies are disrupting supply chains. An economic slowdown is inevitable, but questions remain around its magnitude and length.
The U.S. Federal Reserve brought its policy rate close to zero. The Bank of Canada has taken steps to mitigate the risk of a major slowdown. It lowered its overnight rate and took steps to ensure financial markets have liquidity. The government of Canada also announced a series of measures to support business financing and is working towards other stimulus measures.
Weaker Canadian dollar
Tumbling oil prices and overall economic uncertainty are weakening the loonie. Oil is pressured on two fronts: travel bans cutting the demand outlook for fuel, and oil-producing countries fighting a price war.
Investors are also turning toward the greenback as a safe haven currency given the uncertainty. The Canadian dollar was at C$0.76 per U.S. dollar at the end of February and closed slightly over C$0.71 on March 16th.
Downward pressures on commodity prices
The weaker loonie partially offsets the generalized decline in commodity prices since the beginning of the year. Cattle and hog prices are down 20% and are below the levels observed when China stopped importing beef and pork in September. Canola, soybeans and wheat are down around 8%. Corn prices are down 2%.
We project tighter profit margins in 2020, given the signals sent by futures markets. Returns for some crops are now projected under break-even levels. Livestock profitability is also pressured even if the gap between the supply and demand of animal proteins due to ASF supports margins. However, there’s a real risk that margins will decline if demand weakens, considering the large meat supplies expected to be available in North America.
Agriculture and food are resilient economic sectors. After all, people still need to eat. But food purchasing patterns at home and abroad will be influenced by economic fluctuations. Demand in emerging markets may weaken, given foreign consumers’ food demand is sensitive to income. Domestic spending can shift from indulgence-type food to more basic food staples, from food away-from-home to at-home prepared foods, for example.
While an economic slowdown is inevitable, the economy will rebound. Sound cash flow management and HR planning are useful strategies to be ready for the coming economic disruptions.
J.P. is the Vice-President and Chief Economist at Farm Credit Canada. Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval. J.P. is Past-President of the Canadian Agricultural Economics Society. He obtained his PhD in economics from Iowa State University in 1999.