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Brexit – good or bad for us?

While the ag sector looks for stability in currency markets, short-term price spikes and long-term trade agreements may get overlooked

Financial markets began to stabilize within days of the U.K.’s surprise Brexit vote this past June, but that doesn’t mean the vote has been shrugged off either by the big exchanges or by the markets that set the prices for farm commodities.

It does mean, however, that the world is coming to terms with the fact that there won’t be a lot of quick answers.

For Canadian farmers, it adds up to more uncertainty, and more volatility.

Not only is there a risk of financial instability, but there may also be fallout from the trade deals that get opened up as part of the Brexit process.

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“There’s going to be a lot of negotiation,” says Eric Olson, farm management consultant with MNP in Winnipeg. “The U.K. is a big economy that Europe still wants to trade with, so I don’t think they’re going to exactly leave them out in the cold. But again they’re not going to make it an easy exit.”

Agriculture isn’t likely to be front and centre in those negotiations, but it can still be affected.

“I would expect in the short term that we’re going to be faced with a bit of volatility at a time that is important for Canadian producers,” agrees J.P. Gervais, chief economist with Farm Credit Canada.

Olson believes the immediate impact will be from currency volatility: “Most of our commodities are priced off the U.S. market and the U.S. dollar… the Can­adian dollar has moved up against the euro and sterling and we’ve moved down against the U.S. dollar. So in the short term, Canadian exporters have a bit of a competitive advantage against the U.S. because of the low Canadian dollar.”

Over the longer term, however, red meat, grains and oilseeds can feel the impact of a shift in currency values. “We rely so much on the strength of export markets to not only sell commodities but also price commodities,” says Gervais. “One of the things that we forget sometimes is that we don’t need to export commodities to actually feel the impact. As an example, should China’s economic growth slow down because of the turmoil in the world economy due to Brexit, we don’t even have to export to China to feel some of that because the strength of demand coming out of China does have an impact on commodity prices that are paid to Canadian producers.”

Other sectors can benefit from a weaker Canadian dollar. “Vegetable prices over the last year have been strong and it looks as if this year is going to be a great year as well,” says Gervais. “The connection between U.S. and Canada is not as great as for grains and oilseeds.”

Longer-term impacts are hard to predict, but Brexit will certainly affect trade deals still on the table, like the Canada European Trade Agreement (CETA). “One of the consequences of Brexit is that this trade deal between Canada and the EU will have to be ratified by all parties in Europe instead of just being ratified by the government of the European Union,” says Gervais. “That opens up the possibility that some countries might have different opinions about some very specific provisions of the trade deal which could jeopardize its future, but that remains to be seen.”

“Because we’re an exporting country, trade agreements like CETA are really important. I’m not exactly sure how Brexit will change it but there’s going to be a lot of negotiations. If you’re producing a supply-managed commodity, in Canada, you will probably be hoping the agreement gets better for you,” says Olson. “If you’re producing pork there may be some advantages in terms of market access. I think there’s some opportunity for us. We need to get those agreements in place because we’ve seen what happens if we don’t. When the Koreans made a trade agreement with the U.S. before they did it with Canada, it hurt our hog exports to Korea.”

Britain is a net importer of food so in the long term, once Brexit is completed, it could impact its trade relationship with the rest of the EU, which could open up some opportunities for Canadian producers, says Gervais. “I believe that ultimately the U.K. could be in a worse position than it was with respect to its European partners from a trade standpoint,” he says. “That could open up a few opportunities for Canadian beef or a few commodities such as oilseeds.”

Canada’s agricultural trade with the U.K. isn’t huge. In 2015, the entire EU accounted for only six per cent of Can­ada’s ag exports, but it’s certainly a market that Canadian producers would love to sell more products into. The U.K. is the third-largest populated country in the EU and accounts for 16 per cent of its gross domestic product. “Any time there is volatility in the market, it gives opportunity for producers,” says Olson. “There’s opportunities to take profit out of the market by locking in some better prices because volatility means overshooting, so the market overshoots high. The problem is, it does turn around and overshoot low so producers need to be on top of the marketing side of things.”

So although Brexit may be an ocean away its consequences are likely going to be felt by Canadian producers one way or another.

This article was originally published in the September 2016 issue of the Corn Guide.

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