LETHBRIDGE – Grain processors are entering a risky stage of the business cycle, says one of Canada’s leading economists.
Stephen Poloz, chief economist with Export Development Canada, said all signs point toward a slowdown in the global economy.
A recent downturn in global stock markets has been written off as a simple market correction by some investors, but Poloz said there is more to it.
“We see it as a symptom of something much bigger,” he said.
“The world economy is not just slowing down but the risk of doing business in the world is going up.”
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Poloz said the boom outlook of last year has been replaced by what he characterized as a return to reality, with more reasonable rates of growth.
It’s not going to be a recession. Developing countries including China and India will still post impressive growth rates in the range of six to eight percent, he said.
However, growth in developed countries including the United States, Japan and Europe will slow to a crawl, somewhere between one and three percent per year.
What it means for the grain trade is reduced export potential, shrinking margins and increased risks of not getting paid by the end customer.
“Prepare for an environment that is much more challenging than we’ve been in for the past couple of years,” Poloz warned processors and exporters attending the Canadian Special Crops Association’s annual meeting.
On the bright side, there should be a weakening of the Canadian dollar, which will provide some “modest relief” for exporters.
Poloz said in times of a global economic slowdown, people tend to be driven back to the most important reserve currencies, in particular the U.S. dollar. Other currencies, especially commodity-dependent ones like the Canadian dollar, will decline.
One thing that will help prop up the Canadian dollar is soaring oil prices, a commodity that seems to defy the laws of economics by continuing to increase in price despite crude inventories being at a 20-year high.
Every $10 US increase in the price of a barrel of oil adds three cents to the Canadian dollar, which should prevent a precipitous decline in the currency during the economic slump.
Poloz expects the Canadian dollar to be trading at 83 cents US by the end of this year if oil is selling at $60 US per barrel and 80 cents if oil prices fall to $50 per barrel. That is down from the current level of 88 cents.
But the cost of borrowing money will rise, as will the risk of payment default. While food markets are largely recession-proof, many customers will be moving down the quality scale, which means lower returns for crop traders.
“Profit margins are going to be smaller than they have been,” said Poloz.
He said exporters should be particularly wary of doing business in countries with high debt levels that rely heavily on oil imports. Turkey, Indonesia, Poland and the Philippines pop up on Export Development Canada’s radar screen as being some of the most exposed regions of the world.
Even in China, where economic growth is forecast to remain relatively strong, there could be underlying problems exposed by the slowdown in the global economy.
“Those risks should be significantly higher than they were a year ago,” said Poloz.
