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Commodity prices, trade cloud equipment sales projections

The decline in the Canadian dollar makes imported equipment more expensive for farmers

At Farm Credit Canada, we project total tractor sales to increase 1.4 per cent in 2018 and decline 1.6 per cent in 2019. The outlook for combine and 4WD tractor sales is more pessimistic as sales are projected to normalize to levels below the 2013-17 average sales.

Our projections embed a high level of uncertainty. First, global trade tensions have an impact in two important ways:

1. The Canadian dollar has declined from an average of US$0.783 in the first five months of 2018 to US$0.762 on average in June and July when trade tensions heightened. A lower loonie raises the price of imported equipment for Canadian buyers but is also supportive of Canadian farm income.

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2. Agricultural commodity prices have been trending downward since June given positive crop growing conditions in the U.S. Midwest and weaker import demand coming from China. U.S. soybean prices reached lows in mid-July not seen since 2008, recovered slightly into early August, only to decline once more following the most recent USDA WASDE report.

Global trade tensions have the potential to slow the recovery of the U.S. agriculture sector.

The USDA currently projects net farm income in the U.S. to decline 6.7 per cent in 2018, but the forecast could be revised downward if U.S.-China trade tensions continue, or even deepen. Lower farm income in the U.S. would be expected to lead to softening farm equipment sales south of the border.

U.S. tariffs on steel and aluminum imports further cloud the outlook. These tariffs are likely to increase U.S. farm equipment prices as manufacturers pay more for raw material and steel parts and look to pass on these additional costs to their customers (through a steel surcharge, for example).

Rising U.S. steel prices could disrupt and lower our baseline 2018-19 projections for farm equipment sales in Canada by two per cent, or more if there’s a full pass-through of the higher costs.

Reduced farm equipment sales in the U.S. could lead manufacturers looking to other markets to avoid buildup of inventories, with larger supply potentially partially offsetting pressures to raise prices of equipment. Canadian farm equipment manufacturers are likely to be impacted through reduced U.S. farmer purchases and higher production costs.

The bottom line: Changes in our traditional trade environment can impact ag supply chains. Tracking market developments and gathering information are critical for producers, manufacturers and dealers to adjust business plans over time.

Leigh Anderson is a senior agricultural economist with Farm Credit Canada

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