Low inflation bad for growth

Canada and the world appear to be in a lower-for-longer inflation environment.

That suggests many of the dynamics marking the agriculture economy since 2013 will continue.

Farmers face lacklustre returns, mitigated by weak input price pressures, unless something big happens in the weather.

“If we (continue to) see a low inflationary period, we could see very little growth in terms of farm revenue and we could see some downward pressure on commodity prices, as we see wage growth and willingness to pay for higher quality food items potentially diminish,” said Craig Klemmer, a senior agricultural economist with Farm Credit Canada.

A year ago, many economists predicted that the world had entered a period of general economic growth, which would lead to increasing inflation and increasing interest rates.

That sort of environment tends to create higher commodity prices, both for agriculture products like crops and livestock, and also for inputs like fuel and fertilizer.

However, the world’s markets hit the brakes in late 2018 and global growth greatly slowed. Rather than seeing economic growth build up steam and create rising inflation, growth rates have fallen and inflation is falling. Now in mid-2019, most economists predict that the world’s main central banks are more likely to lower interest rates than increase them.

The Bank of Canada recently held its key interest rate steady, taking a wait-and-see approach as the United States and European Union central banks appear set to attempt to spur inflation by soon lowering rates. Canada’s core inflation fell to two percent from 2.4 percent between May and June.

However, central banks have struggled since the 2008 financial crisis to create solid growth and to hit inflation targets. Inflation evaporated in the 2008-09 crisis, and once the commodity bull market ended in 2013, a key source of pre-2008 inflation disappeared.

For farmers, the end of the commodity bull market has meant lower crop and livestock prices, but on the plus side it has also brought weaker input prices for many products.

That’s likely to continue, Klemmer said, especially if energy prices continue to remain restrained.

“If it’s (supported) by low, flat energy costs, that’s going to mean less upward pressure on inputs, particularly fertilizer and fuel,” said Klemmer.

“It could mean some declines in that.”

Even though finding farm labour is always a challenge, there should not be a problem with wage costs rising too quickly. Wages across the economy are not increasing much.

But as with almost everything in a low-inflation environment, that cost-mitigating factor has a sting in its tail: weak wage growth in Canada and around the developed world means weaker demand for food and less likelihood of higher agricultural commodity prices.

This is also true for other commodities, where stagnant wages give consumers little ability to increase spending.

However, that’s where farmers could be more fortunate than other commodity producers. Minerals and energy are little affected by the weather but crops and livestock can be.

Regardless of a general low-inflation setting, farmers could still see substantial rallies if big weather problems develop somewhere with a major world crop, and the reverse if conditions are ideal.

“You’re going to see prices rally up, even in a low-inflationary type of market, and if (agriculture) production looks strong and consumer demand is softer due to low wage growth … you’ll see commodity prices weaken and (there will be) margin compression (for farmers,)” said Klemmer.

For now, one thing is clear: hopes that farmers will easily get through the low-growth, low-inflation, weak-commodity era have been shelved. Farmers are likely to face more of the same post-2013 conditions until the world’s economy finally gets back on track.

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