Farm Credit Canada’s chief economist says Canadian farmers have a vested interest in seeing the economy pick up even as the world grapples with a COVID-19 recession.
They shouldn’t expect it to happen quickly.
“The silver lining of the entire environment that we’re in is the strength of demand for the commodity that we sell,” said J.P. Gervais during a presentation to the Ag in Motion Discovery Plus virtual conference.
But global forecasts predict negative economic growth into 2021 and although food is a necessity there are too many other factors at play.
The International Monetary Fund forecasts -4.7 percent growth, Gervais said. Canadian forecasts suggest contractions of between 7.8 and 8.4 percent.
“With such a pessimistic forecast there’s no doubt this recession is going to be very, very deep and significant,” he said.
He suggested recent growth will continue but at a slower pace through the second half of this year and next year.
The health of the United States economy is critical as some states struggle to get COVID-19 under control. Anything that slows down the U.S. economy, such as unanticipated COVID-19 cases, could push economic projections lower. He said the situation will become clearer over the next couple of weeks.
Gervais said a low Canadian dollar is always good for margins even though costs go up. The loonie was hovering closer to 75 cents compared to the U.S. dollar for a while, which surprised him.
“I think the market is a little bit ahead of the actual economic pace that we’re seeing in the marketplace,” he said. “It’s always been bizarre to argue against what’s going on in the marketplace but I just don’t see a Canadian dollar ending the year very strong.”
Uncertainty places the loonie more likely at 72 or 73 cents, he said.
Gervais also expects interest rates to remain low until inflation returns to about two percent.
Another factor that will affect the agricultural economy is food-purchasing behaviour. Grocery sales are up 12 percent and about 80 percent of that growth is related to COVID-19, Gervais said.
At the same time, food service is down 40 percent. Even if restaurants do fully re-open he wonders if people will return to their previous spending levels.
Canadians now eat about 30 percent of their meals outside the home and Gervais said that percentage is likely to keep dropping. Other things to watch include the trend toward more conventional retail grocery over the big box stores, increased popularity of private labels, and the buy-local movement.
Meanwhile, he noted that Canadian agriculture has struggled to maintain profitability after two waves of significant growth between 2005 and 2015.
COVID-19 is expected to result in lower input costs but whether that will be enough to break that downward trend is unknown.
Gervais said farmers approached the pandemic crisis from relative strength.
He said there are two lines of defence when it comes to financial health. The first is liquidity, which has been weakening and is under the 15-year average, and the second is a strong balance sheet.
Debt has been growing but so has asset value, and in Saskatchewan, for example, the ratio is below the 15-year average.
“There are some equity gains but the pressures on profitability make the return on equity real low right now,” said Gervais.
From a gross revenue position, livestock are facing more pressure than grain operations this year.
Gervais said he expects a decline in cash receipts of five percent for beef and seven percent for hogs based on the first half of the year.
However, demand for red meat, particularly in North America, is still strong. Industry is working through its COVID-related backlog and prices reflect that.
In its mid-year outlook FCC showed actual Alberta-fed steers at $146 per hundredweight for the first six months of the year, compared to a forecast of $155 and five-year average of $161.
Gervais said inflation is one area to watch especially when it comes to fresh and frozen beef in groceries.
On the pork side, he said profitability doesn’t look good. Gross margin at a farrow-to-finish 500-sow Manitoba pork operation is about $20 per head based on futures prices. Producers under contract may face different circumstances.
“The good news on the U.S. side is the pace of slaughter is picking up but it’s really hard to find space right now for hogs in the U.S. so that’s going to keep prices below the five-year average,” he said.
Profitability will be tight in the canola and wheat markets, but there are bright spots in canola futures and demand for oil.
“The outlook is positive, especially medium to long term, when it comes to pulses,” he added.