FARM CREDIT CANADA'S CHIEF ECONOMIST'S LISTS FIVE MAJOR ISSUES FOR 2014
Jan. 9, 2014
Source: Farm Credit Canada
Flattening land values, trade deals and disputes, U.S. politics and economy, sagging equipment sales, and the bounce-back in beef are the five key agricultural issues to watch in 2014, says Farm Credit Canada chief agricultural economist J. P. Gervais.
North American farmland values have increased rapidly over the past several years, but they could soon plateau, Gervais said in his annual look-ahead. A record-setting harvest in 2013 means increased world supplies and prices retreating closer to their average. Reduced commodity prices could mean many producers will be less aggressive in expanding their operations, resulting in lower appreciation of land values.
"Many producers will be surveying the landscape to determine if they should buy more land or pay off some debt," Gervais said.
The tentative agreement between the European Union and Canada on the Comprehensive Economic Trade Agreement (CETA) may be generating the headlines, but Canada is also negotiating other major trade deals, including the Trans-Pacific Partnership (TPP).
Both trade deals represent a concerted effort to lessen our dependence on the United States, which accounts for 30 per cent of Canada's agriculture exports and two-thirds of agri-food exports. CETA, once ratified, will open up a market of 500 million consumers for Canadian agriculture products, while TPP negotiations involve 12 countries, including New Zealand, Australia, Vietnam, Malaysia, Japan and the United States.
U.S. politics and economy
The ongoing "fiscal cliff-debt ceiling" dispute between Democrats and Republicans resulted in a partial government shutdown this year and continues to pose a risk that the U.S. will default on its debt. However, Gervais predicts the U.S. economy will continue to improve, citing the U.S. Federal Reserve's recent decision to start scaling back its aggressive monetary policy due to strength in the labour market and household finances.
"This change in the U.S. monetary direction can have wide impacts in the financial markets - mostly on the value of the emerging markets' currencies - impacting the competitiveness of Canadian agricultural commodities."
Disputes also distract U.S. legislators from coming up with a long-term plan for the U.S. Farm Bill, which indirectly impacts Canadian producers by influencing the crops planted in the U.S. and therefore world prices. Legislators recently passed a short-term extension of the 2008 Farm Bill and are confident a new farm bill will be enacted in early 2014.
Bullish on beef
Canadian beef producers should expect healthy returns over the next couple of years, according to Gervais.
Stronger beef prices are the result of supply and demand. Cattle numbers have been declining as a result of drought in the U.S. and financial conditions that forced many producers to reduce their herds or leave the sector. The U.S. herd was reduced by five per cent over the past two years and will take several years to recover, while the Canadian herd is stable and appears ready to rebound.
"In the short-term, Canadian producers are in a much better position to serve the North American market, which has seen an end to the decline in per capita red meat consumption. The demand for animal proteins is also growing in emerging markets, such as China," Gervais said. "The European Union trade deal has the potential to give Canadian beef the advantage in other global markets, including Europe."
However, U.S. Country of Origin Labeling (COOL) legislation has hurt Canadian cattle producers, especially the new rules recently issued by the U.S. Department of Agriculture. The coming year will determine if the U.S. government backpedals on this legislation, either voluntarily or through pressure from its trading partners.
Equipment sales gearing down
Farm equipment sales have been on fire for the past five years. From 2006 to 2012, an average of 2,100 tractors were sold every month in Canada, according the Association of Equipment Manufacturers, while sales are expected to be equally as strong for 2013.
With slightly lower crop prices, 2014 could see a retreat in equipment sales closer to the 2001-2005 average, when 1,540 tractors were sold monthly. A weaker Canadian dollar will also make buying imported equipment more expensive.
"In the short-term, we will likely see equipment prices staying steady, but they could soften somewhat if supplies remain high and producers decide to retain their old equipment or buy used equipment," Gervais said.