Where Is Canadian Agriculture Amid the Economic Calamity?


I got asked to speak last week on “agriculture’s place within the current global economic turmoil.”  As topics go, it’s a good one.  It was only five month ago that commodities were so hot; they had become the darling everybody wanted.  Look at any price chart now, and its like we’re at the bottom of that cliff.  Finding our place down here isn’t for the feint of heart.

If you read Darin’s Newsom’s piece this week, he writes about market fundamentals and how that gives us clues for what’s ahead in the market.  In many ways the spread between futures months within the commodity markets measures the appetite of whether end users are bullish or bearish for that commodity. With “global turmoil” seemingly all around us, watching those spreads will be even more key going forward.  As I said a few weeks ago, when corn gets to $8 next time, blah, blah, blah.

It has been a long way down since last July and I can’t quite remember what the futures spreads were saying.  However, “the fundamentals” of grain movement are one thing, the fundamentals of our greater economy are another.  This past week the Bank of Canada cut it’s over night lending rate down .75% down to 1.5%, the lowest since 1958.  As fundamentals go, that’s a huge move and one, which will definitely affect Canadian agriculture “amid the global economic turmoil.”

I have documented many of my thoughts on this long march down to $3 corn and $45/oil.  Of course one overriding thought has been when is bottom and at what point does “economic stimulus” get people (Canadian farmers) to start spending money again.  The Bank of Canada reducing their lending rate to 1.5% to me was a real incentive for farmers to keep borrowing money to foster greater economic efficiency.  It was an example in my mind of a time when money has become so cheap, that its time to get out there again and spend, despite the global economic turmoil around us.

So far Canadian banks have refused to pass the rate cut to farmers and other customers.  So in a way, you could say it was a subsidy to Canadian banks even though in this “global economic turmoil”, the Royal Bank recently reported a profit of 1.12 billion in the last quarter.  However, despite that economic obscenity, sooner or later that credit break needs to filter down to us.

Think about it.  You loyal scribe keeps getting kidded about being “fitty” next month.  “Fitty” means a lot of things, however, it also means that way back in 1981 I had my first bank-operating loan at an interest rate of 23.25%.  However, now, the bank rate is 1.5%!  How can this not be construed as a stimulus?  On the other hand has consumers and farmers spending dried up to such an extent that these low interest rates aren’t working either.  Or is it so bad the Bank of Canada is cutting deeper.  I mean, how much is there left to cut?

Clues certainly came in Thursday’s USDA’s WAASE report.  The big number in corn ending stocks surprised me.  Where at one time last year we were talking about a corn ending stock of less than a billion bushels, the USDA surprised the trade with a figure of 1.474 billion bushel ending stocks for December versus a 1.124 estimate in November, up 30%.  It’s an obvious example of food demand being affected by the great global contraction.  With corn prices plummeting, in normal times, you’d think ending stocks might decrease.  However, these are extraordinary times, its so bad corn stocks grew even more than anybody expected.

You can say it happened because of the second largest corn crop on record.  However, a 30% rise in one month seems quite a stretch over normal, month-to-month variations.  My question is what happens if it’s another 30% next month or 10 or 15%.  It surely has a lot more to do with the global economic contraction versus normal supply and usage.

When the “global economic turmoil” took hold earlier this fall, there were many within agricultural markets who said, farmers will be all right because the “world still has to eat.”  I’ve always had a bit of trouble with that, because I’ve been to parts of this world where people don’t get to eat.  Needless to say, those projections were for the rest of us who always do.  The analogy was made that people will give up a few other things to eat well and commodity markets would respond accordingly.  That hasn’t happened. It makes me think the argument about the “world still has to eat” doesn’t hold much water.

So where is agriculture within this new “global economic turmoil.”  Well, its like it’s been sucker punched and it’s looking for clear skies ahead.  However, that road seems long right now because agricultural demand once lost, seemingly takes forever to get back.  Simply put, if you know, you should tell me.  A year ago nobody saw this coming.  Let’s hope there are no more economic tsunamis.

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