From FCC Express By J.P. Gervais, chief agricultural economist at Farm Credit Canada
The following three economic trends are expected to have the most influence on decisions and long-term strategies of agricultural producers, agri-businesses and food processors in 2016:
Interest rates will remain low – with perhaps upward pressure on fixed rates associated with three year and five year mortgages.
The Canadian dollar will reach a new low against the American dollar before showing strength in the second half of the year.
Economic growth in China and India will follow different paths, yet will sustain a strong demand for agricultural commodities.
Direction for interest rates
The outlook for interest rates is tied to the strength of the Canadian and United States economies. The United States Federal Reserve has started to gradually raise interest rates as U.S. unemployment is low and household spending is robust.
“A low Canadian dollar will overall be supportive of profitability in the agri-food supply chain.”
The oil sector is expected to continue facing price pressures as a result of excess global supply. A potential rebound can only happen if a stronger demand for oil develops, an outcome tied to the health of the world economy. The Canadian manufacturing sector should benefit from a low Canadian dollar and strength in the U.S. economy. As a result, the Bank of Canada projects that the Canadian economy will improve moderately, with real GDP growth around two per cent in 2016.
Thus Canadian interest rates should remain low, with a possible increase in the overnight rate of the Bank of Canada occurring in the second half of 2016, at the earliest. Borrowing costs associated with fixed rate three year and five year mortgages could start climbing with the shift in U.S. monetary policy.
Impact of the Canadian dollar
The different patterns in short-term interest rates between Canada and the U.S. should push the loonie to a new low against the U.S. dollar, before strengthening in the second half of 2016. The weaker outlook for the Canadian dollar is positive for the agriculture and agri-food sectors, and could support profitability in 2016. But it could deter investments in productivity as a weaker Canadian dollar usually raises the costs of machinery and equipment.
Outlook for China and India
Emerging market economies have lost some of their vigour in 2015, led by a slowing China. Yet, personal income growth in China will continue to be among the world’s strongest. That’s a positive driver for global food demand. Conversely, India’s real GDP growth is projected to accelerate in 2016.
Although the powerhouse emerging economies of China and India remain strong, it’s no longer useful to bundle all emerging markets together. Careful attention must be devoted to understanding where growth is coming from, and reflecting on what it means for the demand of commodities like grains, oilseeds, pulse crops and meat.
The bottom line
A low Canadian dollar will overall be supportive of profitability in the agri-food supply chain. Yet, remember that innovation and productivity are the long-term drivers of success.