The top economist at Farm Credit Canada painted a positive picture of Canadian agricultural prospects for 2018, pointing to strong global demand for food, rising Canadian productivity and positive gross domestic product projections in key markets.
But he also said Canadian producers should keep a close eye on interest rates, the value of the Canadian dollar and the outcome of trade deals that could affect market access for Canadian products.
“I’m absolutely positive about the outlook for agriculture,” FCC’s J.P. Gervais said in a Feb. 7 webcast.
“I really do think that 2018 is going to be another good year. But at the same time, we have to have realistic expectations.”
“There’s a bit more uncertainty in the marketplace right now, which to me suggests that we have to be on top of risk management.”
In a 45-minute presentation, Gervais said several factors point to a strong economy moving forward.
Global GDP growth for 2018 is now forecast at 3.9 percent, compared to 2.3 percent in Canada and 2.7 percent in the United States.
The 3.9 percent projection includes anticipated growth rates of 6.6 percent in China and 7.4 percent in India, a scenario that bodes well for Canadian agricultural exports.
“GDP is the one statistic that we use to … talk about the health of the economy worldwide,” he said.
“That (3.9 percent) … forecast has been going up for the past 12 months basically. We were at 3.7 percent not too long ago, 3.5 percent before that and 3.3 percent (before that) so the bottom line is that the world economy is definitely improving … and I think that’s a huge positive when you look at agricultural markets.”
Domestically, the Canadian unemployment rate hit its lowest level in at least five years in December 2017 with the economy gaining more than 150,000 jobs in the last two months of the calendar year.
Rising consumer debt levels are one of the few headwinds facing the Canadian economy, along with the prospect of rising interest rates, he said.
Borrowing rates in Canada are still at historically low levels but the Bank of Canada has increased its prime lending rate three times in the past seven months and could potentially boost rates again in the next few months, Gervais said.
“I’d have to say that we’re likely to get another rate increase, perhaps as early as between now and March-April,” he said.
“It (rate uncertainty) does create a situation in which I believe it is important for businesses to look at their financial situations, look at where they stand. Run some scenarios in terms of income, in terms of interest rates, to see how your ability to meet your financial obligations evolves as rates move up….”
Gervais did not rule out two additional Bank of Canada interest rate increases in 2018, but he said U.S. rate hikes have lagged Canadian increases, a situation that might cause the Bank of Canada to stand pat in the latter half of the year.
The Canada-U.S. exchange rate also warrants close attention.
As a rule, a one cent appreciation in the value of the Canadian loonie relative to the U.S. dollar is assumed to cut the profitability of Canadian grain and oilseed farmers by about $5 per acre.
Based on that assumption, a five-cent increase in the value of the loonie to 85 cents from 80 cents could reduce profitability by an average of $25 per acre.
FCC is projecting the Canadian dollar to stay in the range of 80 cents per U.S. dollar, possibly dipping below 80 cents toward the end of the year.
“I think most sectors (of the Canadian economy) have a vested interest in seeing the dollar below 80 cents,” Gervais said.
On the trade front, uncertainty surrounding key trade agreements such as the renegotiated Trans-Pacific-Partnership and the North American Free Trade Agreement could have far-reaching consequences for Canadian agricultural exports.
Some Canadian producers stand to make significant gains if the TPP agreement is implemented, particularly on exports of red meat, grains and oilseeds to Japan.
At the same time, trade concessions that affect Canadian poultry and dairy could have a negative impact on those sectors, but he added he expects they will adjust.
Gervais said he was not optimistic that issues affecting Canadian pulse exports to India would be resolved in 2018.
Based on that, FCC is projecting a 27 percent reduction in Canadian red lentil acres in 2018, a 21 percent reduction in yellow pea acres, a five percent increase in spring wheat, a four percent increase in durum, a seven percent increase in barley and a four percent increase in canola acres.
Despite narrow margins on many agricultural crops, Gervais suggested that farm cash receipts for grain and oilseed producers will continue to grow, based on higher production volumes rather than higher commodity prices.
Similarly, Canadian farmland values should increase in 2018, although at a slower pace than they have during the past decade.
“I think it would be unrealistic to have expectations that our farm cash receipts are going to grow over the next 10 years like they have over the past 10 years,” he said.
“We’ve had tremendous, never-seen-before growth when it comes to gross receipts at the farm level… .
“I do believe we’re going to be able to grow it further, but maybe not at the same pace as we have….”
FCC projections show average Canadian farmland values increasing by four to five percent in 2017, and another two to three percent in 2018.
FCC’s annual Canadian farmland values report for 2017 is scheduled for release in late April.