Wheat harvest ended for me July 23rd, as the best harvest weather of the season finally won the day. I had a series of “negative externalities” as my economist cousins like to say. That consisted of a soft tire that turned into a nail in the sidewall, a bad wheel bearing and a sprocket moving incrementally on a shaft causing the bearings on my tailings elevator great stress. Needless to say, I was able to head off those problems. My wheat crop was a good one amid a lot of quality problems within the Ontario crop. I call it dumb luck.
The Canadian dollar on que dropped below 80 cents US last week which made those Ontario and Quebec wheat prices a bit better. Of course, per usual grain growers in Eastern Canada will be watching the value of the Canadian dollar in their never-ending attempt to balance grain futures prices with foreign exchange. The Canadian dollar is a thinly traded currency, which usually moves in an inverse fashion to the US dollar. However, it also moves on interest rate changes from the Bank of Canada. Traditionally the Bank of Canada uses interest rates as a hammer on controlling inflation. There hasn’t been much of that lately. It is so different than times before.
It’s interesting how price inflation has moved to the back burner over the years. I can remember inflation rates over 10% annually. In those years, interest rates were double digit and in some cases like 1981 over 20% as the Bank of Canada tried hard to pour water on inflation by making capital so much more expensive. In recent times, the Bank of Canada has always wanted to maintain inflation at 2%. For the most part they have been successful at it. However, things seem to be changing now, as we head into some type of post Covid world.
Inflation now is becoming more of a thing. Look around you, and you can seem it almost everywhere. Inflation is an economic term which refers to an environment of generally rising prices of goods and services within the economy. I think of it as consistently rising prices all around me. Interestingly enough, Canada’s inflation rate jumped to 3.4% in May of 2021, which is the highest rate since May of 2011. Its hard to say where it goes, but we may be seeing the effect of far too much money being infused into a marketplace with nowhere to go. Add in the Covid stimulus on both sides of the US and Canadian border and we are increasingly creating an environment where inflation can grow.
On the farm, we are seeing it in spades. Think about the price of farm machinery you are being quoted or land prices, etc, etc. I was struck by the article from DTN’s Russ Quinn last week about fertilizer where he quoted potash being quoted at $501 (US) a ton, up 10% from June. ($629 Canadian short ton) In the article Russ quoted the following price increases from a year ago.
“10-34-0 is now 34% more expensive, potash is 39% higher, urea is 53% more expensive, anhydrous is 58% higher, UAN32 is 59% more expensive, UAN28 64% higher, and both DAP and MAP are 71% more expensive compared to last year.” (DTN Retail Fertilizer Trends.
Clearly, from a farm perspective, all of this is inflationary. You might like getting $8 corn, but it does create a inflation entourage that surrounds you. It’s a treadmill that has a bit of a self-fulfilling prophecy. Standing still leaves you behind even faster. Of course, if you are sitting on a lot of farm land equity, that gives you a base to ride the wave up.
Andrew Coyne, the Globe and Mail writer, recently wrote a piece on inflation, where he cautioned us that central banks were tamping down inflation expectations, saying that we’ll return to that 2% inflation target. However, he warns the Canadian inflation rate is currently running at an annualized rate of 6.4%. He muses that Central Banks might be wrong in their estimation that they can control rising prices, especially in an atmosphere where people come to expect rising inflation. That could turn ugly, especially if inflation is much higher than expected and interest rates rise significantly to control rising prices.
I find it fascinating, mainly because I lived it many years ago and I don’t know if and when it may happen again. In Ontario and Quebec farm country, inflation is happening. Take the price of land, take Russ Quinn’s fertilizer quotes and convert them into Canadian dollars. Add in advanced technological change into the mix and we might be able to make it all work. However, it’s a changing management horizon for farmers in an environment of what maybe consistently rising prices.
The challenge of course, is finding your way forward. In this post Covid world, it will take work. Our economy is changing again and this time, it would seem inflation is starting percolate. Ditto for the farm.