Canada: The top five economic trends facing agriculture in 2016

January is a time to reflect on the previous year and look ahead to the new year’s challenges and opportunities. With that in mind, here are the top five economic trends you should watch in 2016.

By : J.P. Gervais

1. Agriculture faces little interest rate risk

The overall economic environment is expected to support farming operations, agribusinesses and food processors in 2016. Consider the following:

Interest rates should remain low – with some slight upward pressure on fixed rates associated with 3-year and 5-year mortgages
Continued weakness in oil prices and a different outlook for interest rates between Canada and the U.S. should lead the Canadian dollar to a new low against the USD. It’s expected to show strength in the second half of the year.
Economic growth in China will slow as India’s economy gains speed. Both will sustain a strong demand for agricultural commodities

2. Fewer opportunities for profits as supplies grow

Global agriculture commodity prices are expected to head lower as global supply remains high or increases. Some good news: the low Canadian dollar will continue to provide support for Canadian producers.

3. Canadian farm debt will continue to climb, but at a slower pace

Strong agriculture commodity prices over the past five years led to increased investment in Canadian agriculture. This helped boost the large gains in farmland values and farm equipment sales before 2015. In 2016, look for growth in farm debt to ease for two reasons:

The rise in farmland values will slow as producers re-evaluate the earning potential based on weaker commodity prices
Purchases of farm equipment will decline as producers make efficiency their number one goal. The lower Canadian dollar will compound this issue as farm inputs become more expensive.

4. Weather patterns could cause supply disruptions and opportunities

Weather is expected to create opportunities for Canadian producers in 2016:

Droughts in Russia and Ukraine are expected to lower wheat production
El Nino is expected to reduce palm production in Indonesia and Malaysia as well as pulse production in India. In fact, low carry-over stocks and strong demand for pulses will support prices - 2016 may truly be the “Year of the Pulse” for Canadian producers.
The impacts to cereals and grains isn’t known; corn and soybean production in Brazil and Argentina will likely offset much of the reduced production elsewhere

5. Price conscious consumers demand more food diversity

Producers and food processors face increasing pressures to join the stampede in meeting complex demands for food with conflicting characteristics: fresh vs. processed, healthy vs. indulgent, local vs. global - but most of all, affordable. Canada has traditionally thrived producing agriculture commodities, but that may no longer suffice given:

More world-wide demand for animal-based protein and processed products
The search for solutions to address growing public concerns about modern food production – or the “food democracy” movement
A mature domestic market demanding the food that’s deepened Canada’s trade deficit (from $1.9B in 2010 to $3.5B in 2014)

Some important trends that didn’t make the final cut:

Ratification and implementation of trade agreements such as the Comprehensive Economic and Trade Agreement (CETA) and the Trans-Pacific Partnership (TPP)
The lack of available farm labour and the resulting upward pressure on farm wages
Patterns of fertilizer prices

Despite their absence in our list of top five trends, each of these has the potential to impact future business plans.

Check back with us throughout 2016 as we review these key economic drivers of Canadian agriculture and agri-food. Understanding the trends is the first step on the path to capture opportunities.

By : J.P. Gervais, Chief Agricultural Economist, Farm Credit Canada