The farm lender maintained its prediction that GDP growth would slow to around one per cent.

The effective blockade of the Strait of Hormuz, which has restricted the flow of oil and gas from the region, has pushed commodity prices to multi-year highs, FCC economist Krishen Rangasamy wrote in a March 18 report.

Pros and cons

The jump in prices could spell opportunity for Canada, Rangasamy said.

WHY IT MATTERS: Higher fuel and fertilizer prices for farmers today could be followed by higher borrowing costs in the future if core inflation persists.

“Given its high historical correlation with commodity prices, nominal GDP (which matters for government revenues) is likely to also perk up.”

If commodity prices stay high, the federal government and governments in resource-rich provinces such as Alberta or Newfoundland and Labrador could see higher revenues. That doesn’t mean governments will spend more, Rangasamy said, but there’s potential for a spending-related GDP boost.

However, fertilizer prices are among those surging due to the conflict which is weighing on the ag sector. Higher prices for fuel can also push up inflation and erode consumers’ buying power.

Trade war damages

Last year, Canada’s economy saw the worst performance since the 2020 pandemic recession — growing just 1.7 per cent, Rangasamy wrote. Export volumes fell on an annual basis for the first time in five years.

Government and consumption spending offset weaknesses in housing and business investment. However, based on a slumping household savings rate, consumers also dipped into savings to maintain lifestyles. This means Canadians have little cushion to absorb future shocks.

“With no end in sight to America’s trade war … look for trade and business investment to act as a drag on Canada’s economy again in 2026,” Rangasamy said.

Government and consumption spending may not provide as much of an offset this time. Rangasamy noted the government has telegraphed caution related to public spending. While ambitious public projects are in the works, that spending isn’t expected this year.

Interest rates and the loonie

If commodity prices stay high long enough, businesses may be forced to raise prices which could lead workers to demand higher wages.

“That could potentially trigger a wage-price spiral,” said Rangasamy.

The Bank of Canada could pre-emptively raise interest rates to prevent core inflation from taking off. However, he predicted the bank would stay in “pause mode” for several months.

FCC predicted the Canadian dollar would trade in the 72- to 74-U.S. cent range for most of the year, but acknowledged currency volatility could temporarily take it outside that range.

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Rack Petroleum Ltd.’s HedgeHog app has won the company the 2024 Ag in Motion Innovation Award for business solutions.

The digital platform allows users to confirm a guaranteed price for diesel for future delivery up to two years into the future.

Also known as “The Rack,” the agricultural services company was already hedging fuel on a “pen and paper, phone call method for a few years” before launching HedgeHog, said chief operating officer Cassandra Morari at the Ag in Motion farm show site in Langham, Sask.

The company operates 11 self-serve fuel stations across Saskatchewan and offers direct farm fuel deliveries.

“Farmers are able to manage their risk by pricing diesel ahead of time, the same way they would price their canola,” said Morari.

“Fuel tends to be something that doesn’t get a lot of time and attention,” she added.

There are no added fees for using the hedgeyourfuel.com app, and discounts are available for bulk purchases.

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After a constitutional court ruling last month that cancelled 60 billion euros of earmarked debt, the federal government last week announced plans to save around 900 million euros ($983.34 million USD) annually in subsidies for farmers.

According to next year’s budget, a partial tax refund on agricultural diesel, along with a tax exemption for agricultural vehicles, will be abolished to meet the saving targets – a measure farmers said would threaten their livelihood and the competitiveness of Germany’s agricultural sector.

Farmers protested the planned cuts at the Brandenburg Gate, carrying placards reading “YOUR POLITICS ARE A DECLARATION OF WAR AGAINST FARMERS” and “TOO MUCH IS TOO MUCH! IT’S OVER NOW!” parking a number of tractors along Berlin’s Strasse des 17. Juni boulevard in central Berlin.

Germany’s DBV and LSV farmers lobbies called for the protest last week and on Monday threatened to organise further country-wide demonstrations if the measures were implemented.

“Then from January 8th we will be present everywhere in a way that the country has never experienced before. We will not accept this,” DBV President Joachim Rukwied said.

The cuts, agreed by the ruling coalition leaders of the Social Democrats, Greens and Free Democrats, could cause dispute not just within the coalition, now opposed by FDP liberals, but also within the Greens party itself, as Greens Agriculture Minister Cem Ozdemir joined the farmers in Monday’s protest.

“I will do everything in my power so that this won’t happen this way, ladies and gentlemen,” Ozdemir said.

Additional burden

Farmer Jule Bonsels from the western Rhineland region said the tax break cancellation meant an additional financial burden of some 20,000 euros per year.

“I personally find this unacceptable. We must give young people prospects, and these plans totally kill it,” she added.

Government spokesperson Steffen Hebestreit on Monday said decisions on the 2024 budget were in place and won’t be reopened, adding that the details of implementation were still being examined.

The cuts also aim to help reduce greenhouse emissions in the country’s agriculture sector that was responsible for 55.5 million metric tonnes of greenhouse emissions last year, roughly 7.4 per cent of the country’s total.

Environmental groups said farmers could bear the financial burden of the cancelled subsidies, citing profits made from rising food prices and other agricultural subsidies that are still in place.

“With all understanding for the farmers – making agricultural diesel cheaper by the state is expensive, harmful to the climate and should be abolished,” Greenpeace agricultural expert Martin Hofstetter said in a statement on Monday.

Erwin Decker, a wine farmer in Germany’s Black Forest region, said implementing the planned cuts would force many family-run farms to close across the country.

“What are we supposed to do? The land is there. It has to be harvested and if it turns into a jungle, no one gains anything,” Decker said.

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That was the message as Farm Credit Canada provided its latest update on input prices for the 2024 crop year.

Why it matters: Wild price swings for crop inputs, especially fertilizer, appear to be over, but farmers should keep abreast of issues that might affect prices as they plan for spring planting.

Fertilizer prices reached new highs in 2022 when the war in Ukraine threw a wrench in the machinery of global supply that was already tight. For months, chaos reigned in the markets as a result of the conflict and related international sanctions against Russia and its ally, Belarus.

Natural gas prices skyrocketed as Russian supply choked off, leaving previous European customers scrambling to find new suppliers. Russia was previously Europe’s main supplier of natural gas, while both Russia and Belarus are important fertilizer exporters. With that supply off the table, global fertilizer demand surged.

Today, FCC experts said, the world seems to have acclimatized to a new normal.

“It’s safe to say the world got used to trading these different commodities from elsewhere in the region,” said Leigh Anderson, senior economist with FCC and author of the organization’s 2024 Crop Input Outlook.

As demand softened because of high prices, global fertilizer production and supply increased. Russia was heavily embargoed on the international stage but found markets for its fertilizer. China also re-entered the urea export market, pushing global production volumes.

“While there’s not necessarily a price premium anymore, we’ve gotten comfortable with the other suppliers filling that void,” Anderson said.

However, the economist warns that European production isn’t certain and China is unpredictable.

“China will still be a wild card if, for whatever reason, they change policy,” said Anderson. “That’s on most commodities; they can always change their decision on a dime. We’ve seen that in other markets and commodities over the years.”

But for now, Anderson said there seems to be a sense of equilibrium as ripple effects of the previous market rollercoaster are working their way through the system.

Producers may have lower prices, but efforts to predict supply and demand during volatile times were a challenge for retailers.

After the spikes in 2022, fertilizer prices collapsed. Retailers who had committed to buying supply at those higher prices were left holding the bag.

“Most of us had a pretty huge debacle in terms of selling at a negative margin,” said Ray Redfern, president and CEO of Redfern Farm Services, a crop input retailer based in southwestern Manitoba.

“The reality is that we’re going to be even more nervous about making a long-term commitment for fear that we have a situation where we lose hundreds of dollars per tonne on everything that we sell.”

If retailers shy away from pre-orders, producers could have limited options and may have to settle for whatever retailers have on hand. Redfern said supply remains tight for many fertilizer products and prices are expected to remain under pressure early into the New Year.

Drought conditions in the Canadian Prairies, which have reached crisis levels in some parts of the West, could also soften demand, since lack of moisture could mean more residual nitrogen in the soil.

Chemical inputs

The global recovery of agro-chemical production, along with softer demand, has led to increased global supplies, according to FCC.

“Overall, global prices have moderated for both glyphosate and glufosinate,” the lender said in its report.
Redfern sees more price stability in all the crop protection products his company offers.

“For crop protection products, whether it’s fungicides or herbicides, that market is more stable,” he said.

“There is less uncertainty in terms of product supply now that the supply chains are working as they should.”

Fuel

On fuel, FCC suggests that diesel prices will trend lower in 2024 as global economic growth slows.

“Our preliminary estimate indicates that farm diesel prices will be 2.8 [per cent] lower in 2024,” the report said. It cautioned that continued global uncertainty and low U.S. supply could keep prices high.

Demand-side pressures

Anderson’s report indicated several factors can affect the market and producers should keep their ears to the ground.

Canadian crop receipts were up 19.8 per cent for the first half of 2023, driven by strong sales of canola and wheat. But in drought-stricken areas, crop receipts are expected to decline significantly this year and into the first half of 2024.

“Strong farm cash flow remains key to crop input sales,” said the report. “Pre-purchase trends for the remainder of 2023 may provide an early indication of what the sector can expect for 2024.”

There are also general economic factors to consider. The Bank of Canada held its policy rate last month, which could indicate a plateau in interest rate hikes. FCC predicts interest rates will lower by the second half of 2024 as the global and Canadian economies weaken.

– This article was originally published at the Manitoba Co-operator.

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The outright price of Nigerian crude Qua Iboe surpassed $100 a barrel on Monday, according to LSEG data (all figures US$). Malaysian crude Tapis reached $101.30 last week, said Bjarne Schieldrop, analyst at Swedish bank SEB, in a report.

Oil has risen to its highest level of 2023 as investors are focused on the prospect of a supply deficit in the fourth quarter after Saudi Arabia and Russia extended supply cuts. The two are the biggest producers in the OPEC+ group, most other members of which are also curbing output.

“The overall situation is that Saudi Arabia and Russia are in solid control of the oil market,” Schieldrop said.

Brent oil futures, a global benchmark, traded as high as $94.89 on Monday and the related benchmark used for trading much of the world’s physical cargoes, called dated Brent BFO-, stood just above $96 according to LSEG.

Qua Iboe, and some other crudes priced against Brent, are above $100 already because they are based on the price of dated Brent plus a cash differential or premium, currently assessed by LSEG at around $4.25 a barrel.

Schieldrop said dated Brent is highly likely to move above $100 as “only noise is needed to bring it above.” Swiss bank UBS sees Brent futures reaching triple digits.

“We expect Brent to trade in a range of $90–$100 over the coming months, with a year-end target of $95,” said UBS analyst Giovanni Staunovo.

— Alex Lawler is an oil and energy sector correspondent for Reuters from London.

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And while that move was bullish for the markets, by how much remains to be seen, said Phil Flynn of the Price Futures Group in Chicago.

“It’s probably put a floor under the price of oil,” Flynn commented. “The question is how high will it go?”

Reports said that in addition to the Saudi cut, the rest of the 23-member alliance would reduce its output by a net 400,000 BPD.

To justify the cut, Saudi Arabia said there’s a looming supply glut in the global oil market that’s already contending with weaker prices.

Flynn said crude oil modestly increased but there were still issues, noting there continued to be tensions within OPEC and OPEC+.

As the week of June 5 started, prices for Brent Crude and West Texas Intermediate gained more than $1 per barrel. However, by mid-afternoon that Monday those gains faded to well below 50 cents per barrel (all figures US$).

Prices are “struggling because the Saudis made some comments…that they’re fed up with OPEC members who aren’t meeting their oil output goals,” Flynn explained, pointing to some of the cartel’s African members.

Also, Flynn said another report on Monday indicated Russian oil loadings at the country’s western ports hit a four-year high in May, as they produced as much as they could and sold it at a discount.

“The Saudis are calling for more transparency from the Russians as to how much oil they are producing,” he added, pointing to Russia previously promising its OPEC+ partners it would reduce its output.

As for Saudi Arabia, Flynn stated the kingdom believes it can push up oil prices and not hurt its share of the global market.

However, he said the current market has been nervous and pessimistic as to what could come down the road. Otherwise the oil market normally looks ahead to see what could transpire.

“They’re erring on the side that demand is going to fall off the map even though that hasn’t happened yet,” Flynn said, noting that supplies remain tight.

North American prices will climb upward again, he added, suggesting gasoline in the United States could reach $5 per gallon.

“But I think the market is going to need a little convincing in the days ahead as to whether the economy can stand this production cut and see if inventories really tighten,” Flynn said.

One wildcard he cited was Russia, as it likely wants to avoid a price war with Saudi Arabia.

“If they don’t keep the Saudis in their back pocket this turns into a price war, and neither one of these countries are going to win,” Flynn emphasized. “But the jury is still out as to whether the Russia can comply.”

It’s estimated OPEC+ is responsible for 40 per cent of the world’s crude oil. The alliance is comprised of the 13 members of the Organization of the Petroleum Exporting Countries and 10 additional members including Russia, Mexico and Kazakhstan.

— Glen Hallick reports for MarketsFarm from Winnipeg.

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Barra made her comments during the automaker’s annual shareholder meeting.

GM is pursuing a two-track strategy: Investing heavily in electric vehicles for North America, China and other markets, and funding those investments by trying to maximize profits from its North American combustion pickup truck and large SUV lineups.

Barra said GM is planning higher-priced versions of its Silverado large pickup and its large SUV models.

GM and its Detroit rivals Ford and Stellantis rely heavily on sales of large pickup trucks and SUVs for global profits. High U.S. gasoline prices in the past have undermined consumer demand for relatively inefficient models.

Nominal pump prices hit an average of above US$5 a gallon for the first time ever last week, the federal government said Friday.

GM is ramping up production of EVs. Barra said the Cadillac Lyriq electric sport utility is sold out through 2023.

In response to shareholder questions, Barra said the “clear priority” for using cash generated by its operations is to “accelerate our EV plans.” She did not rule out share buybacks or other approaches to returning cash to shareholders.

GM still expects to increase production this year by 25-30 per cent, despite continuing pressure on semiconductor supplies globally. Barra said GM is working to redesign vehicles to reduce the number of processors required by 95 per cent.

Barra serves as GM’s board chair and CEO. GM shareholders overwhelmingly rejected a proposal to separate those roles.

— Joe White is a Reuters global automotive sector correspondent in Detroit.

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According to Ron Campbell, operations and member service manager with the Ontario Agri-Business Association (OABA), the upward trend of per-bushel drying costs is a universal concern for the province’s grain elevators. While specific numbers for fuel are hard to identify, particularly propane, which is sold privately, Campbell says OABA members continue to see year-over-year increases in fuel costs. 

Why it matters: Fuel is the most significant grain drying-related expense. It’s also the expense that has seen the greatest increase.

One propane representative recently told Campbell their company has experienced repeated cost increases of 30 per cent. The issue for both natural gas and propane stems from a variety of factors, including tight inventories in the United States and challenges with shipping liquified gases to Asia. 

Those factors led to challenges across the world, including in the United Kingdom where natural gas costs caused a major nitrogen producer to cease operation. 

“From the drying and grain elevator perspective, every cost centre has gone up, but fuel has gone up the most. It’s the biggest single cost centre in drying,” says Campbell. 

“We recommended to our members to monitor their costs and adjust accordingly, but I don’t think anyone will be able to cover those costs without pricing themselves out of the market.”

Rob Gamble, senior economist with Grain Farmers of Ontario, says specific fuel prices are hard to identify since they vary from day today and by location. In terms of Ontario grain dryer use, general estimates suggest a 60-40 split between natural gas and propane, with propane more expensive than natural gas.

Using GFO’s Grain Drying Costs Calculator, Gamble provided an example of how market prices and the federal carbon charge can affect drying costs. 

He noted 500 acres of corn at 175 bushels per acre results in 87,500 bushels, or 2,223 tons. Assuming 10 points of moisture must be removed, and 3.4 litres of propane are required to remove one point of moisture per tonne, 75,569 litres of propane will be required.

• At 90 cents per litre, the cost is $68,012.

• The forthcoming 2022 carbon charge at $50 per tonne of GHG adds an additional $5,857, which translates to $11.71 per acre.

• At 2030 carbon charge levels ($170 per tonne GHG), costs reach $40 per acre.

Using the same metrics, the cost to dry 500 acres of 175-bushel corn by 10 moisture points with natural gas is $51,120, based on a cost of 19 cents per cubic metre and 2.3 cubic metres requirement per point of moisture, per ton. In 2022, the carbon charge adds $4,997.

If these metrics are extrapolated to the province as a whole and combined with the 60-40 split in fuel type, Gamble says drying Ontario’s two million acres of grain corn costs $132.1 million and the total carbon charge tallies at $21.36 million.

“If we do that same scenario and we had a wet year where people take corn off at 28 per cent, it jumps to nearly $28 million in 2022, and nearly $95 million in 2030, just for carbon charge on two million acres of corn,” he says. 

“We had cases last year where the carbon charge was almost as high as the cost of natural gas. That really was upsetting for a lot of [grain dryers]. The charge is not a proportional charge on the cost. It’s a volume charge. It doesn’t matter what the price of fuel does, the carbon charge remains the same in terms of calculating cost.”

The challenges brought by high market prices and government policy could be offset with alternative drying methods. However, Gamble says there is little technology to replace fossil-fuel grain dryers. Significant investment in current systems is another complicating factor. 

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On April 1, the federal government’s carbon levy on diesel will go up from 8.05 cents per litre to 10.73 cents, a 33 per cent increase. Last December, the federal government promised $15 billion in new spending on climate initiatives until 2030, such as electric vehicle charging infrastructure, home retrofits and tax write-offs for zero-emission vehicles.

According to data from Natural Resources Canada, the average retail price for diesel on the week of Feb. 11 was $1.159 per litre including taxes, the highest seen since last March. Average prices on Friday ranged from $1.051 in Lloydminster, Alta. to $1.369 in Grand Falls, N.L.

Roger McKnight, chief petroleum analyst for En-Pro International in Oshawa, Ont., said every dollar change in crude oil prices translates to 0.6 cent at the pumps. He added that the carbon tax would make Canadian fuel less competitive on the markets.

“South of the border, they don’t have that sort of thing. It puts us at a disadvantage,” he said. “Transportation costs (along with those of) goods and services in this country will be significantly higher than they are in the United States…You’re at a disadvantage compared to an American shipping firm.”

McKnight also explained that a possible shutdown of Enbridge Inc.’s Line 5, carrying oil and natural gas from Wisconsin to Sarnia, Ont., would also raise prices even higher, but they may ease when COVID-19 vaccines reach a greater amount of the population. He predicts diesel fuel prices to increase by five to eight cents per litre over the next few months in addition to the carbon tax.

Bill Campbell, president of Manitoba-based Keystone Agricultural Producers (KAP), said the organization has followed diesel fuel prices closely. Farmers in Manitoba, Saskatchewan and Ontario are exempt from paying the carbon tax for fuel used on farm equipment and vehicles not licensed for public roads, but it still has a downward effect on farmers’ revenues.

“When we see an increase of that carbon tax, businesses will probably increase their costs and what they charge people,” he said, adding that the tax is also paid to transport crops to market.

KAP had been in talks with the federal government with regards to new programs for farmers funded by the carbon tax, but Campbell said there has been “no clarity” from the government as to whether revenues from the tax generated through agriculture will be returned to agriculture.

“We want to be recognized for the good that we do with regards to storing carbon in the soil and in our products… We are also asking for an exemption on grain drying and the heating and cooling of livestock barns,” he said.

“We have adapted (to the tax) pretty good, but to be hit with an additional carbon tax for the production of food needs to be really looked at and clarified to ensure Canada has food security and economic sustainability. We need to address what agriculture provides to this country.”

— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.

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“We think the market’s getting kind of overdone down here and this might be your best chance…if we do get a cold winter I think we’ll see these prices really pop,” said Phil Flynn of The Price Futures Group in Chicago, Ill.

Crude oil prices have been down lately. On Nov. 5 Brent crude closed at US$72.16 per barrel and West Texas Intermediate crude at US$62.52. Both oil benchmarks have slid more than 15 percent since hitting four-year highs in early October.

However, even with oil prices on the downswing, Flynn said there should be concern about diesel prices. Supply has been tightening globally, which could lead to a price spike.

“As of last week I think (the United States oil stocks were) five per cent below the five-year average and there’s a lot of concern that if we get a really cold winter it’s going to be difficult to meet that demand and get caught up,” he said.

China is also facing a tightening supply, according to Flynn. Latest news out of the country has the Chinese government telling the western provinces to ramp up purchases of diesel and heating fuel for the winter. China has faced supply shortages in the past and the government is trying to lower the chances of that happening again.

There have also been reports out of Russia that they are thinking of putting export duties on oil because they’re concerned about their distillate fuel supplies heading into the winter.

According to Flynn, this all leads to there being an overall bullish backdrop for diesel prices.

While gas prices have been lower than diesel prices lately on the Prairies, consumers shouldn’t be expecting diesel prices to come down, according to Flynn.

“If you look at the supplies of gasoline, they’re really above average for this time of year. Even though demand has been relatively strong, diesel fuel is below average and that’s why you’re seeing that discrepancy,” he said.

While the U.S. sanctions against Iran have been making news headlines in regards to oil prices, Flynn doesn’t think this has been affecting diesel markets much due to 180-day exemptions the U.S. has placed on eight importers who work with Iran.

“Right now the market seems to be dismissing those because of the waiver and I think one of the reasons they had to give waivers is because of the tightness of distillate,” Flynn said.

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