Canadian agricultural commodity groups are not overly concerned about the potential of their largest customer slipping into recession.
North American commodity exchanges went topsy-turvy last week as market speculators tried to figure out whether the United States economy is heading into a prolonged downturn.
If it is, there could be serious ramifications for Canada’s export-dependent economy. But agriculture doesn’t appear to be overly concerned despite its huge reliance on the U.S. market.
According to Statistics Canada, the U.S. purchased $13 billion of Canadian agrifood products from Jan. 1 to Sept. 30, 2007. The next largest customer was Japan, which accounted for more than $2 billion in sales.
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Some Canadian commodity groups say the products they ship to the U.S. are largely recession proof. Others say they may feel the sting of an economic downturn but it would pale in comparison to the smack in the face that other pressing issues could deliver.
Dave Hickling, vice-president of utilization at the Canola Council of Canada, said the topic hasn’t even been raised in boardroom discussions.
“People still have to eat and things like food are not going to be affected as much as many other sectors of the economy,” he said.
Hickling estimates the U.S. buys about 2.5 million tonnes of canola seed, meal and oil from Canada annually, or about 30 percent of total exports. Those sales aren’t about to dry up if the economy hits the skids.
“(Edible oil) is certainly not a luxury or discretionary type of product,” he said.
Kelly Davey, market analyst with the Canadian Wheat Board, gave a similar assessment.
Exports of wheat and durum to the U.S. market are expected to be down for the 2007-08 crop year, falling to an estimated 1.5 million tonnes from 2.4 million tonnes in 2006-07, but that is due to an adequate U.S. wheat harvest and smaller exportable supplies from Canada.
“We expect, because wheat is a basic need, that (exports) won’t go down much more, even with a recession,” said Davey.
An economic downturn could have an impact on wheat prices but it is hard to determine exactly what that would be.
One school of thought suggests there would be less cash, borrowing and spending in the economy, which could mean less money flowing into commodity markets and downward pressure on wheat prices. Another suggests there may still be money to invest and agricultural commodities may be viewed as a safe haven for that cash.
Fund managers control about three-quarters of the money invested in wheat on the Chicago Board of Trade. What they do with that cash could outweigh the underlying market fundamental of extremely low stocks of old-crop wheat.
“They can push the price one way or the other,” said Davey.
Larry Sears, past-chair of the Canada Beef Export Federation, said the cattle industry might have a tougher go of it than the grain and oilseed sectors.
“Beef traditionally has been something that’s purchased when the consumer has enough money to eat the king of meats,” he said.
“What could potentially happen, I suppose, is that demand would be reduced somewhat and therefore the price.”
That would be significant because an estimated 75 percent of Canada’s beef and cattle exports are shipped to the U.S. However, the industry is making headway in Asia, Mexico and Europe that could offset potential lost sales to the neighbour to the south.
Sears said nobody in the cattle industry is losing much sleep over a potential U.S. recession. They are far more concerned about the U.S. country-of-origin labelling law and attempts by R-CALF to block shipments of Canadian beef and cattle into that market.
“We have a much higher risk there than we do on the recession end of things,” said Sears.
