Inflation, the Loonie and Interest Rates On The Move

It is a pleasant time of year.  The evenings are growing cool, almost cold.  That is always a reminder in late August that the harvest season is almost upon us.  Last week I even had to get some starting fluid to help start an older tractor of mine.  There is even talk of a possible frost in Ontario next week.  Spare me.  That is way too early to talk about Jack Frost.  The crop outside my window still needs more time.

Today, we found out the latest crop estimates from Statistics Canada for the principal crops in the field.  In Ontario, Stat Can is estimating 3.1 million acres of soybeans at an estimated yield 44.6 bushels per acre.  This is a 10.2% increase over 2016.  On the other hand, Statistics Canada is staying with their estimate of Ontario corn acres at 2.1 million acres with a projected yield of 161 bushels per acre.  What this translates to is a very good crop for Ontario albeit about a week or two behind last year.  We will need some extra heat in September to bring this big crop home.

The Statistics Canada report was interesting for a few other anomalies.  For instance, Québec corn production is actually going to be down approximately 6.6% from last year.  On the other hand, Manitoba soybean production is pegged at 2.3 million acres, a 27% increase from 2016.  Saskatchewan soybean acreage has tripled from 2016 up to 845,000 acres.  Clearly, if it keeps going, Western Canadian soybean acreage is set to explode in the years ahead.  That will surely challenge Western infrastructure.  They will need a lot more soybean processing to make it all work.  The lowest basis levels in North America are not a good thing.

Clearly, we have some intriguing agricultural production not only in Ontario but also a Western Canada world, which is expanding exponentially.  It’s being done in some relatively lean times price wise.  We are fortunate that interest rates are still low.  That has been the fuel for much agricultural expansion over the last several years.

This is taking place in a grain marketplace, which has being bearish for the last 4 to 5 years.  Prices have been range bound for a number of commodities with a few notable exceptions like wheat this past July.  However, what I find particularly intriguing is the strength in the Canadian economy.  Statistics Canada released their latest statistics on the health of our economy last Thursday.

Statistics Canada reported that Canada’s gross domestic product increased by 1.1% between March and June.  Now, this might not mean much to most of you but on an annualized basis that’s an economic expansion of 4.5%.  That is huge for a country like Canada and is the highest that figure has been since the third quarter of 2011.  It means that the economy is growing rapidly and with a rapidly growing economy more people go back to work and more money flows in the streets.  It is also good for food demand.

Of course all this good economic news is having an effect on expectations.  It didn’t take the loonie long to gain back what it had lost previously currently fluttering over the $.80 US mark.  Of course, nobody knows the future but there is already people out there predicting a $.91 loonie.  However, that is almost sport in Canada predicting where the Canadian dollar will go.  If it is down to $.78 by next week there will be somebody predicting it going to $.68.  It is such a whipping post.

With the Canadian economy in overdrive the loonie is not the only concern.  For instance, do you remember inflation?  The Bank of Canada has wanted to contain inflation at 2%.  They have been doing a good job at that.  However, with our economy growing at an annualized rate of 4.5%, that becomes more difficult.  We’ll start having too much money chase too few resources and that could result in inflation going up.

The way central banks control inflation is with higher interest rates.  So as we look into next week it will be interesting to see what the Bank of Canada does with interest rates.  Is not beyond the realm of possibility that we will see interest rates go up again and again in the next several months if our Canadian economy remains strong.  Of course it will also matter what the US Federal Reserve does.

A lot of times when you consistently decipher the agricultural economy you can ignore what’s going on in the nonfarm economy.  Sometimes it’s just swimmingly in the background.  This would be one of those times except for the fact that our economic growth rate is so high, and the specter of higher interest rates is suddenly more real.  It’s happening at a time when our agricultural commodity prices are low.  It’s happening at a time when we really can’t ignore it.  What we need is a black swan to come along in the next six weeks to make agricultural markets better.  In lieu of that, its time for vigilance.  Inflation, our loonie and interest rates seem to be on the move.