An economic reality check for Canada’s farm sector

Chaotic trade and financial environments dominate first half of 2019

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Many analysts predicted market uncertainty for 2019 and so far, those predictions have come true.

With trade wars, mixed-result political dealings, and an overall unstable global economy, the situation for Canadian farmers continues to be concerning – though not inherently dire.

Why it matters: Uncertainty about markets, politics and the global economy are causing anxiety for many in Canada’s farm sector. Careful business planning is critical in such environments.

Trade war entrenchments

Jean-Philippe Gervais.
photo: Supplied

“We expected a volatile 2019 and we got one,” says Jean-Philippe Gervais, vice-president and chief agricultural economist for Farm Credit Canada (FCC).

Gervais, in delivering a talk to Ontario vegetable growers last February, said uncertainties regarding trade south of the border were a significant barrier to making confident predictions for 2019. This continues to be a problem, and one exacerbated by ongoing, and in some cases seemingly deepening, trade wars.

This most notably relates to disputes between the United States and China, as well as Canada and China. As these disputes continue, says Gervais, uncertainty regarding the overall global economy heightens.

“There were trade tensions that we knew were going to happen … what we didn’t expect perhaps is the impact on the global economy. We knew it was going to have an impact, but maybe not as fast,” he says. “The belief is if this continues to the end of the year it’s going to have a negative impact.”

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Gervais says a general economic downturn globally could affect demand for Canadian products.

“The things I’m going to be looking at is the state of the economy worldwide…. Demand needs to be very strong to absorb a strong North American supply,” he says.

Some progress has been made, however. Gervais says trade relations with the U.S. are better compared to early 2019, and a new North American trade deal has been hammered out, although legislative approval is still needed. The worst-case scenario for Canada would involve going back to the state of having no North American trade deal, which would cause greater uncertainty.

China seeing red

Market access issues between Canada and China are causing significant issues as well. Some of them were not anticipated earlier in the year.

The hollowing-out of China’s domestic pork supply due to African swine fever (ASF), once thought of as a significant opportunity for Canadian hog farmers, has not come to fruition. Indeed, China has shut Canadian producers out completely, turning the previously anticipated windfall to a commercial impossibility. A steep increase in American pork production also prevented prices from stabilizing at loftier levels.

“We’ve seen the production in the U.S. really take off … more than what we expected,” says Gervais. “We’re stuck in an environment where one or two key markets are shut down.”

Eric Schwindt, an Elmira-area farmer and chair of Ontario Pork, says producers in the province are making some sales, though less than what was hoped for.

He also reiterates how demand for Canadian swine was expected to grow by the month because of China’s ASF crisis. This half came true — he says the Chinese herd is down by at least one-third compared to the previous year — though not in a way that benefits Canadian hog farmers.

“The half that didn’t come true is they haven’t taken Canadian pork and North American pork in general,” says Schwindt. “It hasn’t met our expectations.”

With China also sealing itself from all Canadian pork and beef imports because of issues with forged health certificates, he says per-head profitability has continued to decline by $20 to $30 per carcass.

Feed problems

There are also issues in the Ontario feed market thanks, in part, to the vomitoxin issues in the 2018 corn crop, plus the late planting season of this year. Schwindt says livestock producers were originally worried about feed quality, but are now contending with higher than anticipated feed prices.

“The thinking was 2019 might help put things back on a good footing…. But the sector hasn’t achieved the success people hoped for,” he says.

“The biggest fear is the impact of these trade issues. The impact on our sector seems disproportionate to other commodities.”

Dollar still (mostly) steady

Gervais says uncertainty about the Canadian dollar is ongoing, though perhaps not as severe as some fear. Earlier FCC predictions predicted the price of oil and interest rates would keep the loonie at an average of 75 U.S. cents, which is generally ideal for Canadian agricultural products. In fact, Gervais, in his February talk, said a Canadian dollar holding strong around 75 cents U.S. will help offset the pressure exhibited by strong international competition for grains, oilseeds, pulses and horticultural crops.

But since then the U.S. has cut interest rates in response to an expected world economic slowdown, and it appears a further cut will be made before year’s end. This can cause the loonie to rise.

“We’ve seen the loonie flirt with 77 to 79 cents,” Gervais says.

Regardless, he is still confident a more ideal value will be maintained. He adds the loonie tends to be insulating in chaotic markets, and all the economic uncertainty thus far this year has actually applied downward pressure to its value.

Whether or not a 75-cent loonie will help protect Canadian corn growers from higher-than-expected corn acres south of the border is harder to say.

Overall, Gervais says uncertain times are a reminder to look at investments carefully, and make business plans accounting for a range of profitability possibilities.

“Don’t look at the last 12 months as the way things will be for the next five years,” he says.

About the author

Contributor

Matt is a freelance writer based between Essex County and Chatham-Kent. He is interested in all things scientific, as well as rock n' roll, hunting and history. He also works with his parents on their sixth-generation family farm.

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