FCC’s chief economist expects a hike of 25 basis points unless Bank of Canada decides the economy isn’t strong enough
Farm Credit Canada’s chief economist says producers should prepare for another possible interest rate hike in July.
J.P. Gervais told Soy Canada’s annual general meeting held during Canada’s Farm Progress Show in Regina last week that he expects a hike of 25 basis points unless the Bank of Canada decides the economy isn’t solid enough to handle one.
He said the current uncertainty in trade negotiations is a factor.
“I do believe they’re going to raise interest rates once in July and then we’ll see towards the end of the year if the economy is going fast enough for interest rates to still climb,” he said in an interview. “We’re definitely, despite all the headwinds, we’re still in a rising interest rate environment.”
After that, he said opinions diverge on whether more hikes will follow.
But he said an increase of 200 basis points could put agriculture in a tough spot.
“We’re half-way there,” he said, referring to increases already this year. “There’s still some time to adjust but we need to think about that.”
Gervais said rates go up not just because of the Bank of Canada but what is going on in the economy overall, such as exchange rates.
“A one cent change in exchange rates, so going from 78 to 77 cents for example, triggers as much as a $5 increase or decrease, in this case an increase, in net income on a per-acre basis,” he said. “It’s a big deal.”
FCC is still predicting the dollar will stay below 80 cents U.S. and is working on a forecast of 78 cents, Gervais said.
A lower Canadian dollar is good for Canadian agriculture. Recent weakness in the currency is a result of international trade uncertainty, he said.
He said the potential trade dispute between the U.S. and China has been characterized as a good opportunity for Canadian soybean growers, but the narrative is changing.
“I think we’re underestimating that any big importer that raises the price of what it’s going to buy — China raising the price of the soybeans it’s going to buy — is going to trigger a decline in demand and a decline in the demand is going to lower the reference price,” he told the meeting.
A country the size of China is able to pass through some of the costs it essentially imposes on itself through import tariffs, he said, because it can move costs on to its suppliers.
He said there is also the question of where U.S. soybeans will go in this situation.
Excluding this uncertainty, Gervais said the stocks- to-use ratio for soybeans is falling and that means a tighter market. For the last 10 years, trade growth in meal has been five percent while oil is up four percent.
He said the overall outlook is positive.
Demand for Canadian agricultural commodities is strong domestically and in foreign markets.
“That’s a big thing because production is climbing everywhere,” he said. “On the domestic side of things, consumers here in Canada are actually evolving their food preferences (and) spending more of their dollars actually on food.”
Asked if Canadian agriculture has become addicted to lower interest rates and what type of increase it could handle, Gervais said rates have basically been declining since 1995.
Farmers tell him they’ve been going short-term variable on their loans and haven’t had any problems.
“For some customers it makes sense to stay where they are,” he said.
“Perhaps you don’t have to change anything but at least make sure that you run some scenarios in terms of softer pricing for the commodities that you sell (and) lower yields,” he said.