By Vincent Cloutier
Inflation is at its highest level in decades and interest rates are rising, meanwhile oil and fertilizer prices remain high despite a welcome summer dip. Fortunately, margins in the fields for the current season are attractive and the start of the crop season is promising.
Agriculture has always weathered economic storms well. The year 2022 will be no exception, if yields are good. Despite that, concerns about rising inflation and interest rates remain. The impact is compounded by the financing – both short and long term–required to conduct agricultural activities. The Bank of Canada surprised many by raising its policy rate by one per cent at its July 13 meeting. Experts were expecting 75 basis points, as the Federal Reserve Board recently did in the United States. Further increases are likely to occur this fall at the September 7 and October 22 meetings. Where will it end?
Some of the answers can be found in the factors behind the current surge in inflation, including labour shortages in several industrialized countries. The Russian-Ukrainian war is also contributing to this, causing a reorganization of Russian oil and fertilizer export channels as a result of economic sanctions. Add to this China’s zero-COVID policy, which has acted as an important inflationary factor. Indeed, any slowdown in this key global manufacturing country reduces the supply of goods, which consequently fuels inflation. Despite the continuing uncertainty about the COVID virus and its management there, the ongoing reopening of the Chinese economy bodes well.
On the other hand, whether it’s gas, food or rent, rising costs are changing consumer behavior. The savings – which the decline in consumption of services and historic government interventions have put into the pockets of consumers during COVID – will gradually be depleted, and consumption behavior will change accordingly. Thus, in the wake of the economic slowdown, or worse, in the second half of 2022, the National Bank’s economic team anticipates that rate hikes will cease before 2023.
What about agriculture? Despite the 2021 drought in Western Canada, Canadian agriculture has experienced two years of record net income. Record grain prices, affordable inputs and interest rates prior to the current boom, as well as stability provided by supply management, explained it for the most part. The Canadian agriculture balance sheet data published by Statistics Canada and the analyses that follow show the strength of the sector. Land, infrastructure and quotas are all supported by very strong assets, although the rate of growth in their value will be lower in 2022. Rising interest rates are also a shock to the Canadian agriculture industry, but current signals indicate it will absorb them well.
Loan renewal remains a challenge in this environment. Frank and open discussions with your financial partners are more essential than ever to develop risk management strategies that are well adapted to the reality of your business.