“Whoa Canada” Farmers Brace for Federal Deficits

I got a call a few weeks ago to speak about the “Canadian economy.”  No, not the Canadian agricultural economy, but the whole enchilda, the Canadian economy.  So its pretty obvious this financial meltdown thing is getting pretty serious.  After Alan Greenspan said he didn’t understand why everything went sour, my phone starts ringing.  Hey, you might as well give me a shot, nobody else seems to have a clue.

Oh, how the mighty have fallen.  Last year about this time I headed to Grande Prairie Alberta, one of the richest places in Canada.  With oil prices just feeling their oats, I landed in a blizzard of -40 degree snow, only to finally see where the pot was at the end of the rainbow.  With oil patch wealth complemented by the burgeoning growth in agricultural commodity demand, money was everywhere.  Now a year later oil is below $50, agricultural biofuel is teetering on the verge of economic obsolescence and our government is openly warning us about growing deficits.  Whoe, Canada.

The long, winding road behind me is strewn with market analysts and economists who thought they knew what was a head of them.  However, what seems so clear at times can change on a dime when some unexpectent comes along which nobody expects.  For me it was the weekend when Lehman Brothers vapourized, Merrill Lynch was sold for pennies on the dollar and AIG got bailed out with a $85 billion loan.  At that point, I knew this was different.  I fully expected commodities to tank and tank they did.

Of course as I said last week, I’m still walking on eggshells feeling for bottom, which seemingly never comes.  One of the greatest barometers of our greater Canadian economy is our lovable loonie.  It was only a short year ago when it reached briefly over $1.10 and Canadians were rushing to spend those dollars in the United States.  Today the loonie finished at 77.33 cents US.  It’s reflecting a Canadian economy heavily weighted toward commodities and specifically oil.  With oil under $50 from its high of $147 only four months ago, our petro-currency isn’t so lovable anymore.

At the same time, there has been great movement toward the American dollar.  It’s appreciated 17% against the US currency so far this year.  However, that doesn’t matter much in Canadian farm country.  Simply put, as it goes up the loonie goes down and visa versa.  It’s a double edged sword, but if I was to guess, I think Canadian agriculture would take a 80 cent loonie any day compared to par.  Having that advantage along with a free trade agreement gives us a head start even before we open the barn door.

Into this mix our government is stepping.  Yesterday’s throne speech outlined our government’s intentions in wake of the worst financial times in some 70 years.  For farmers the public words said they intended to give Western Canadian farmers “marketing choice”, code for imasculating the Canadian Wheat Board.  In the same sentence, the government said it supported supply management.  However, in a minority situation, the Canadian Wheat Board is going nowhere, and the same parliament won’t touch supply management.

Nonetheless agricultural policy will surely be shifte into the dust heap of government back alleys.  The priorities definitely lie within the manufacturing sector in Ontario and Quebec.  Expect an auto bailout to match the US bailout.  With bottom still elusive with regard to the markets, expect the government to move into deficit as they try to maintain services without the tax base to finance it.  It’s hard to believe all of this started because of all that sub-prime mortgage debt.

All of this has made the great agricultural biofuel induced bull market of 2007 and early 2008 seem so retro.  It’s pretty obvious right now our biofuels economics are about as stable as a wrench riding on the tail gate of a truck.  Nonetheless, in Parliament this week I saw an Albertan MP talk about how his government was putting their faith in our agricultural biofuel future.  It was almost like he was delusional.

However, that’s like saying I know what’s going to happen and he’s nuts.  Of course to me its pretty obvious what will happen.  Aggregate demand for our commodities and other consumer durable goods will continue to fall until we reach bottom and the economy recovers enough to spur demand back.  In early commentaries I said that would take about a year and a half until 2010.  I was hoping to be very wrong with that prediction.

In the meantime in the short term our new agricultural reality is one of significantly higher costs and great outward pricing uncertainty with both futures and basis.  Our agricultural policy world is in flux with no direct commitment to the agri-flex inititive currently being touted.  Yes, we’ve been there before.  Yes, I still see corn, soybeans, wheat, canola pulses, barley and a whole host of other things growing five years down the road in Canadian fields.  We’ll find a way.  Sooner or later, this once in 70 years financial drama were acting will have the curtain come down.  I just hope there won’t be an encore.

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