How long will the Bank of Canada maintain its trendsetting interest rate at 1%? That question is particularly pertinent to the health of the agricultural economy in Canada. If you heard me speak across this country over the last few winters you will know that I often say low interest rates are the testosterone of the agricultural economy. Simply put, as long as interest rates remain very low, to some extent it trumps lower revenues and will continue to serve as a stimulus for Canadian agriculture.
Some of you may argue that is a null point. Take myself for instance. If you read this column over the last 28 years you will know that I paid the high interest rates in the early 1980s, topping out at 23.25%. There are even some of you who said that they paid higher rates than that. So for those of us with gray hair who remember those days, we are constantly looking over our shoulder. However, is it realistic to think that we might be going back to those times? Is it more realistic that even if we have a double or tripling of the Bank of Canada interest rate to 2 or 3%, interest rates will still be low and the testosterone within the agricultural economy won’t be much different?
I tend to think the latter at the moment in 2014. I will always carry around that dark shadow of 20% interest rates but it is my own problem and I’m afraid over time I’ve been captive to it for many years. Needless to say, young people in agriculture are used to the opposite, cheap capital and that is translated into burgeoning values for farmland and other farm assets. As we move ahead into 2015, that surely may all change, but by increments not by leaps and bounds.
I say that partly because of what Bank of Canada Gov. Stephen Poloz said last week when he appeared before the Canadian Senate. Among other things he said the lower price of oil may knock off a quarter-point from Canada’s gross domestic product in 2015. Of course he was talking about this partly because the price of oil has decreased even more lately and currently trading at 81.29 US dollars on the futures, even less in the wilds of Alberta. There are some projections that the price of crude could reach $75 US for West Texas. I even heard one extreme prediction on Bloomberg News about $10 oil. Needless to say when you’ve been relying on expensive oil to boost your economy having that pillar erode before your eyes can make central bankers nervous.
It means that interest rates are likely to remain low beyond what you might expect. For almost 2 years now I have been saying we could expect higher interest rates in 2015 because our American friends will eventually have to cool their economy. That economy is gearing up now but still doesn’t need to be cooled. Lower oil prices are helping our American friends and boosting their economy. In Canada, where our government relies heavily on oil revenues, there sure is a shifting of gears from both the Bank of Canada as well as our finance department.
Of course one casualty in the lower price of oil may be the value of the Canadian dollar. It has been refusing to go below $.89 for a week now after reaching $.88 earlier. However there are many including the Toronto Dominion Bank and the Royal Bank looking for the loonie to head toward .8475 US. The Canadian Imperial Bank of commerce has even set a target rate of $.82 US. Our Canadian dollar might not be a petro currency, but at times like these it could almost fool you.
So it is a bit of a mixed bag when it comes to the overall effect on Canadian agriculture. Firstly, low interest rates look to be here for the immediate future and even if they do double and triple, does that really matter now? With a lower dollar that means higher cash prices and with the recent unexpected rally in the grain futures market maybe the recent bearishness is all just noise.
Of course it’s all relative isn’t it? If we go back to 2012 I was selling corn off the combine for $7.50 a bushel. I was driving through fields of 225 bushels per acre. This year I’m struggling to get my soybeans off because of constant rain and wet conditions. Planting wheat is just a theory now.
It simply means just like always the only constant we have in agriculture is change. However, on the interest rate front that is not looking like it will change anytime soon, maybe even through 2015. Our farm inputs for 2015 and maybe 2016 will be more expensive, but even that mirage will go away over time. The kicker will come someday when interest rates do go up significantly. That day seems so far away. For those of us who can’t shake thinking about it, the 1980s were 30 years ago. Our world is still the potpourri of change and despite how hard it is to shake off the past sometimes, it’s good to do that. Our next challenge will surely be just around the corner