This past week we had the calendar date change and suddenly we find ourselves in the spring of the year, something that almost all farmers would welcome.  We haven’t had much hint of spring yet as the temperatures have been rather cool, and March has been full of snow and ice and rain.  It was interesting today seeing President Joe Biden land in Ottawa.  The backdrop of his plane was shrouded in fog surely an effect of the melting snow. Let’s hope for good things looking ahead. Maybe a little bit of US Canada diplomacy in Ottawa can get things started.

The US and Canada certainly have their share of problems.  At this early hour it looks like the Americans and Canadians have come to some agreement on the closing down of the irregular border crossing at Roxham Rd Quebec.  There will also be more discussion of Canada taking more refugees and who knows what else but probably a general economic discussion and surely inflation will be part of the narrative as well. On both sides of the border governments are struggling with how to bring inflation to its knees.

The positive news on inflation is that in Canada it is down to 5.2%. This can be compared to the rate in January 2023 of 5.9%. According to the Canadian Press, this is the largest deceleration in inflation since January of 2022.  Of course, this has come after unprecedented interest rate increases, which traditionally have always been a hammer for inflation.  Food inflation is much higher and of course all of us in the agricultural realm know how much more fertilizer prices are versus two years ago.

The specter of higher consumer prices can sometimes be a self-fulfilling prophecy. In other words when people start believing things are just going to be higher later, that tends to happen. The big deceleration in the inflation rate is good news and hopefully it will not be exasperated by anymore supply shocks like we saw with Covid and the Ukraine Russian war.  The problem is, as always, we don’t know what shocks might come to our economic system in the months to come.  Add the bank failure contagion that I talked about last week and you have an economic landscape which is totally uneven.

Thankfully, I am not tasked with trying to solve these problems but there are Canadians who are such as finance minister Chrystia Freeland who will bring down the federal government budget this coming Tuesday.  It will likely be a big spending budget similar to the one released in Ontario today which had the largest provincial spending of all time. Keep in mind these are inflation adjusted dollars, but surely those numbers on Tuesday will be mind boggling. There might even be tax hikes specifically with the GST HST, which would raise billions for the federal government. You might watch out also for green initiatives to satisfy the climate change narrative of this present government.

As it is, unemployment is still very low in Canada.  For instance, in February of 2023, it had dropped to 6.1%.  Keep in mind that this has come after huge pandemic spending and the economic shocks from the Russia Ukrainian war. It is expected that governments will reduce its deficit spending over time.  For instance, I think our Canadian federal deficit was about $354 billion in 2021/2022. This was ten times the deficit level it had been the year before. Looking ahead, our federal government has released deficit projections of 154.7 billion for 2022/2023, $60.6 billion in 2023/2024 and $30.7 billion in 2024/2025.

We will see on Tuesday if these estimates are outdated.  The latest I’ve heard is for about a $90 billion deficit for this fiscal year. Within this cauldron of money sloshing around interest rates will surely continue to act as the hammer.  Unfortunately, inflation likely will remain a tough one to tame. It takes time especially when you have economic shocks going on caused by wars and post pandemic supply constraints.

Take Canadian fertilizer prices for example.  Much of the Ontario fertilizer supply was sourced early this year, partly because of all the problems that we had last year. In many ways it is hard to criticize anybody for that. However, at the same time we saw the price of natural gas almost go negative which is a major cost in the production of nitrogen and other fertilizers.  Over time, maybe considerable time fertilizer prices will move lower for Canadian farmers. However, the inflation genie unleashed last year in agricultural inputs will remain very difficult to put back into the bag.

The inflationary road ahead will certainly be determined by the US Federal Reserve as well as the Bank of Canada and other central banks around the world. Like I said last week, they need to do the heavy lifting to calm bank jitters.  Of course, they also might have to continue to raise interest rates to slam the inflationary dragon further.  The Bank of Canada continues to preach about their 2% inflationary goal. I would like to see it, but it seems so long ago. There’s just been too much water under the economic bridge over the last three years to make it believable to me.  I hope I’m wrong.