Economy: Consumption slowdown, inflation downtrend and interest rate implications

A second consecutive year of weak growth is in the cards as the impacts of earlier interest rate increases are felt more acutely throughout the Canadian economy in 2024. Consumption spending, which accounts for nearly 60 per cent of GDP, should see a marked deceleration as households struggle under the weight of record high debt servicing (Figure 1), elevated shelter costs and a more challenging labour market.

The economic slowdown will reinforce the downtrend in inflation, causing long bond yields, and ultimately longer-term rates on fixed rate loans, to drop further in 2024. In contrast, short yields should be anchored by the Bank of Canada’s decision to keep its overnight rate unchanged for another few months. But once the central bank is convinced that the inflation downtrend is sustainable, which we’re expecting to happen around mid-year, look for it to start cutting its overnight rate to boost a flagging economy.

Crops: Canola crushing set a first quarter record

Canada’s canola crushers set a record in the first quarter of the 2023/24 marketing year as new capacity came online (Figure 2). Canadian canola crush expansion was initially slated to add 4.5 million metric tonnes in 2024 however, rising construction costs, higher interest rates, and tight canola supplies the last several years have led to delays in projects. Increased canola crush may help swing acres to the crop, although the soybean to corn futures ratio will still be the global bellwether to understand trends in seeded acres. U.S. producers will have incentives to plant more soybeans at the expense of corn acres if the ratio stays at today’s level.

Cattle: North American cattle herd continues to shrink

The North American beef herd is going to be smaller on January 1, 2024, compared to a year earlier. Even strong prices have not been able to stem herd reductions as producers have dealt with droughts in 2 out of the last 3 summers, with heifers and cows accounting for 51 per cent of slaughter in 2023 (Figure 3). Provided 2024 provides bountiful rain for hay and pasture, rebuilding the herd will be a multiyear process as when looking back through time the high prices during 2015 and 2016 only resulted in herds staying flat.

Hogs: Canadian slaughter capacity in 2024

The USDA is expecting Canadian pork production to decline a further -1.2 per cent in 2024 as the world faces a current oversupply of pork. Producers around the world continue to be pressured on margins leading to herd reductions, including the world’s largest producer, China. Canadian producers are going to face tight margins until at least the summer although there has been increased demand for pork domestically as consumers are shifting consumption patterns to lower priced protein options.

Dairy: Lower feed costs to provide boost to profitability

With input costs stabilizing, dairy margins in 2024 should improve compared to the last few years with current estimates comparable to margins in 2019. Feed availability and pricing – which have been extremely volatile in the last three years – will be the ultimate determinant of profitability. A bountiful U.S. crop in 2023 sent corn futures tumbling to a three-year low. With corn being the market-maker in other feed grain markets, this put downward pressure on feed wheat and feed barley costs as well, even in western Canada where drought limited production. A +/- 10 per cent change in purchased feed costs can swing overall profitability by +/- 40 per cent. To get a sense where the price of corn is headed in 2024, producers will want to keep an eye on corn production estimates from South America and on prospective plantings of corn in the US this upcoming growing season.

Crop inputs: Fertilizer affordability to improve

Declining crop prices and elevated farm input prices notably fertilizer have been on the minds of Canadian farmers. Our fertilizer affordability index is a top chart to monitor. The ratio between fertilizer and crop prices is an indication for fertilizer affordability, calculated by the price of fertilizer divided by the crop price. It highlights the relationship between fertilizer prices and crop prices, or simply inputs and outputs.

Our fertilizer affordability index based upon the major crop rotations has improved for both canola-wheat and corn-soybeans due to weaker global fertilizer prices relative to crop prices. The lower the ratio, the more affordable fertilizer becomes relative to the crop. Overall, the fertilizer affordability trends indicate optimistic 2024-25 crop profitability. Nitrogen has shown improved affordability across most major crop commodities. Spring wheat and canola prices have held up the most relative to nitrogen prices contrasted to corn. The ratio of commodity prices relative to the price of phosphate is also expected to improve despite more upside potential for global phosphate prices in 2024. We will continue to monitor fertilizer affordability as spring planting approaches.

Farm equipment: High borrowing costs expected to weigh on sales

The farm equipment industry has faced supply chain issues for several years which impacted delivery of equipment from manufacturers. Reduced deliveries coupled with strong demand for farm equipment reduced inventory levels of both new and used farm equipment in 2022 and into 2023.

Supply chain issues are largely behind us and deliveries from manufacturers continue to arrive. As such, inventory levels are expected to increase in 2024. Rising inventory levels of new equipment will spill over to the used equipment market.

Inflationary pressures on new equipment prices along with higher borrowing costs are expected to slow farm equipment sales. Elevated interest rates have resulted in more caution as producers delay purchase decisions until interest rates stabilize or fall. Operations place a large focus on the cost per acre of equipment in relation to overall total costs on the farm.

–Written by Farm Credit Canada (FCC) senior economists Leigh Anderson, Graeme Crosbie and Justin Shepherd.

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Successful projects will receive between $2,000 and $10,000 to fund initiatives, including community centres,day care centres and artistic projects, such as theatrical productions.

“As a self-sustaining federal Crown corporation serving the agriculture and agri-business sectors across Canada, FCC values the ability to offer service in both official languages,”  Kellie Garrett, FCC senior vice-president, strategy, knowledge and reputation said in a release.

Last year, the FCC Expression Fund donated $50,000 to nine linguistic minority community projects in Canada. Community and volunteer groups located in English and French linguistic minority communities are encouraged to view the eligibility criteria and apply online at www.fccexpressionfund.ca. Applications will be accepted until Dec. 14. FCC will announce the selected projects in spring 2013.

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Farmland values increased in every province except Prince Edward Island, which remained the same. Saskatchewan experienced the highest increase at 8.8 per cent, followed by New Brunswick with an increase of 6.3 per cent and Quebec with a 5.9 per cent increase.

Three provinces experienced similar percentage increases: Nova Scotia (4.3) Newfoundland and Labrador (4.0) and Manitoba (4.2).

The two western provinces showed similar increases. British Columbia’s farmland values went up 2.3 per cent, while Alberta’s values increased 2.2 per cent during the last six months of 2008. Ontario farmland values continued to rise with a 1.9 per cent average increase.

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Most provinces continue to see growth in farmland values, with British Columbia experiencing a huge 14.5 per cent increase. Overall increases are consistent with an upward trend in land values since January 2000.

With the largest increase in B.C. at 14.5 per cent, Alberta shows the second largest increase at 10.3 per cent. Saskatchewan follows closely behind with an average 7.8 per cent increase and Manitoba is experiencing a similar per cent increase of 7.3 per cent.

Quebec shows an increase of 3.6 per cent, while Ontario’s farmland values increased slightly at 1.2 per cent during the last six months of 2007.
Atlantic Canada land values varied, with Nova Scotia showing a 3.1 per cent increase, while Prince Edward Island and New Brunswick indicating decreases of 1.4 per cent and 3.3 per cent, respectively. Newfoundland and Labrador land values remained the same in the second half of 2007.

For more information see www.FarmlandValues.ca

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