2009 should be a good year for farmers, says TD Economics

Despite the growing likeli­hood of a global economic recession next year, a combi­nation of still relatively high crop prices, a weaker Canadian dollar, and an easing in cost pres­sures are expected to lead to another good year for Can­a­da’s overall farm sector in 2009 according to TD Economics in a new report entitled 2009 Pros­­pects for Canadian Agri­cul­ture.

While some simmering down in cost pressures will be welcome News for livestock pro­ducers, next year will conti­nue to prove challenging for that area in light of the recent imposition of country-of-origin labeling (COOL) for beef and pork products by the U.S. gov­ern­ment. 

Recovery from rollercoaster

The year 2008 has been a rollercoaster year for agricul­ture prices, with prices surging  during the first half of the year only to retrace those gains in sub­sequent months. An un­ex­pected surge in global crop sup­plies has been a key dampening influence. And while agricul­ture markets are not as vulnerable to a global recession as other commodity areas, they have not been immune to the general flight out of commo­dities and other perceived risk­ier assets. TD Economics be­lieves that the further downside risk to prices is limited and that a recovery should be in place by mid-2009.

As well, the Canadian dol­lar, which is expected to trade in a lower range of 80 to 90 U.S. cents in 2009 compared to nearly parity through much of this year, should continue to prop up prices in Canadian-dol­lar terms.   

Creating demand

Though the speculative ele­ment is unlikely to return to the same extent in the foreseeable future, and crop prices should remain above their 2002-07 average level. For one, firm  demand in China and India and a number of other emerging markets is expected to remain in place both in 2009 and beyond.

Total global imports of food and live animals to China alone have more than doubled since the start of the decade. Second, while lower oil prices will like­ly curb the push for alternative energy sources, existing etha­nol mandates in place in the U.S., Canada, and abroad will continue to create incremental crop demand.

Canada will likely also see U.S. livestock prices rise, fuel­led by lower inventories of cattle and hogs.

Unfortunately for Canadian livestock farmers, the benefits of higher U.S. prices are likely to be muted by falling demand for Canadian imports due to the newly-implemented U.S. coun­try-of-origin labeling (COOL) legislation, which has increas­ed the cost to U.S. packers of segregating products from out­side that country.    

Lower costs

While U.S.-dollar agricul­tural prices overall should end 2009 on a firmer note com­pared to the start of the year, the average level of prices forecast “ which is expected to be well below that of 2008” should be a drag on farmers’ net incomes next year.

However, a number of other factors will help to provide an offsetting boost to bottom lines in 2009, including a softer Canadian dollar, falling energy prices, anticipated lower trans­portation and fertilizer prices, and a gradual easing in credit conditions.  A simmering down in cost pressures facing farmers will be the number one factor supporting net farm incomes over the near term.   

Future looks bright

TD Economics released a positive report last year, entitled A New Era for Agri­cul­ture. The thesis of the report was that even though agri­cul­ture markets would always be prone to short-term swings, the sector’s overall longer-term fortunes, especially for crops, had brightened in the wake of rising incomes in emerging markets, government mandates for ethanol and other oppor­tunities in areas such as organ­ics.

Despite this year’s flurry of developments and ongoing challenges in the livestock sector, TD Economics stands by that assessment. While sig­ni­ficant challenges remain, the pendulum will continue to swing to the sector’s unprece­dent­ed opportunities in the global marketplace.

To view the full report see: www.td.com/economics.