Loonie predicted to fall to 87 cents US | Interest rates critical to farmers with large debt loads
BRANDON — The bottom won’t drop out of the agricultural markets in the next few years if Royal Bank of Canada economists are right.
“Our general view is that crop prices should remain historically high … higher than what were prevailing, say, in the 1990s or in the early part of the (2000s),” said RBC assistant chief economist Paul Ferley in a presentation at Manitoba Ag Days Jan. 21.
Ferley said RBC thinks continuing economic recovery in the United States will increase demand there and help Europe recover, while a Chinese economic growth rate of about seven percent will keep commodity demand strong, if not growing as quickly as in the mid-late 2000s.
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However, Canadian exporters outside of agriculture will continue to show the weakness they demonstrated last year.
If those conditions apply, then a number of beneficial factors will help Canadian farmers:
- The Canadian dollar should drop to about 87 cents US by the end of 2015.
- Interest rates won’t greatly increase, although 10 year bond rates will probably increase by 140 basis points by the end of 2015, or 1.4 percentage points on an interest rate. Short-term rates should increase by .25 percent on an interest rate.
- Commodity prices will hold onto the higher plateau levels reached in the 2000s.
Ferley said interest rates could rise sooner if U.S. growth and/or Chinese growth are stronger than expected. As well, increased Canadian exports could lead to a higher loonie.
However, the dollar could fall lower than 87 cents if China and the U.S. slip, and commodity prices, including crop and livestock prices, would suffer.
Ferley said there are many promising signs that the U.S. economic recovery is picking up momentum, while Chinese growth does not appear to be faltering.
Those two dynamics underpin the entire global economy, so the general outlook is moderately good.
China’s growth rate probably won’t be high enough to drive commodity prices back to bull market highs, and other emerging markets probably won’t do it either because they are weaker now than a few years ago, Ferley said.
As well, U.S. economic growth is modest and will still likely cause unemployment levels to stay historically high, restraining both demand and inflation to low if positive values.
“We’re not talking about further gains from where we are now, but generally maintaining those higher levels,” said Ferley about overall commodity prices.
Interest rates are key to farmers who carry big debt loads, and Ferley said farmers should expect to see a gradual rising of rates even before central banks begin raising their key rates in 2015.
Short-term commercial debt will probably increase by .25 percent over current rates, while 10 year debt will increase by 1.4 percent on an average interest rate.
Ferley said a lower Canadian dollar will help all exporters, and the outlook for the currency is much lower than it was just a few months ago.
Until six months ago, RBC expected that the loonie would range 92 cents to $1 US over the next two years, but weak exports in the second half of 2013 prompted economists to suspect that the relatively high Canadian dollar was dragging more significantly on exporters than previously thought.
He said the loonie needs to drop a few cents to 87 cents US to come back into balance, in which the dollar is at a level that allows for strong exports and recognizes that performance.
The loonie is historically strong compared to the early 2000s and late 1990s but softer than for most times in the last decade.
