As we settle into fall, the reality of living with the COVID-19 pandemic long term is hitting home for all of us. The pandemic has changed how we work, how we connect and even how we celebrate a festive event or grieve a loss.
We are having to adapt. Many of us are searching for ways to improve our coping strategies, including our mental health, to manage this new reality. We are focusing on our homes, physical exercise, hobbies, strengthening relationships and many other things that provide peace of mind every day and restore our sense of purpose.
The hardest thing for me to accept about this new world are the uncertainties. Will a vaccine or treatment options be developed soon? How long will we be dealing with this virus? How will this global recession and the changing economy affect my industry and me? How long will we need to use social distancing and will it change long term how I feel about crowds, eating in restaurants or being in public spaces?
These are just a few things my mind likes to chew over regularly these days. I know you must have your own lists of worries. Your livelihoods are directly connected to COVID-19 and I’m sure you’ve wondered more than once about future demand for the crops you grow and how volatile markets could affect your incomes this year and in 2021 and beyond.
Watching J.P. Gervais, vice-president and chief agricultural economist for Farm Credit Canada, discuss economic trends in his presentation “Beyond the Great Lockdown: Risks and Opportunities in Agricultural Markets” at Ag in Motion Discovery Plus this past July, helped me understand the elements influencing markets during COVID-19. Gervais’ insights on the global economy and COVID-19 and how various factors have and will affect Canadian agriculture provided me with some clarity and alleviated some of that uncertainty I mentioned earlier. I was also pleasantly surprised that many of his messages were positive for ag.
One of the first points Gervais makes is about macroeconomic trends. Because Canada is a net exporter, the health of the global economy “matters a great deal” to Canadian agriculture. Gervais said, “We have a vested interest in seeing that the global economy picks up and starts to grow again.”
At the time of his presentation, the International Monetary Fund put the forecast for the world economy at -4.7 per cent, which he pointed out is quite significant. When the world economy approaches zero in terms of its growth, it triggers a global recession. With such a negative forecast, Gervais said the recession is going to be “very deep and significant.”
At the end of July, the forecast for the Canadian economy in 2020 was to contract by 8.4 per cent, said Gervais, with an increase of 4.9 per cent in 2021. What’s critical to understand, is we’re not going to get back to the economic activity levels that prevailed at the end of 2019. “We’re going to start growing again in this quarter as well as the next quarter and throughout 2021, but despite the rapid pace of increase or rebound in the economy … at some point this recovery is going to start to slow down. We’re going to grow, but at a little bit of a slower pace in the second half of the year as well as into 2021.”
Another factor to watch out for, warned Gervais, is the resurgence of COVID-19 cases in the United States and whether or not this will put pressure on the overall U.S. economy because it is such a big driver of the world economy. At the time of writing this editorial, cases in the United States and Canada were on the rise and the next few weeks should tell how the U.S. economy will react.
However, Canada is in a position of strength on many fronts. One of those strong positions is the demand for Canadian agricultural products.
“One of the silver linings, I believe, in the entire environment that we’re in, is the strength of the demand for the commodities we sell,” Gervais stated.
For example, demand for canola should remain strong, he said. This is also echoed by Craig Klemmer, a principal agricultural economist with FCC, in his July 28 report, 2020 Grainews, Oilseeds and Pulse Outlook Update: Weather and Global Demand to Influence Profitability. “The EU demand for Canadian canola is expected to remain strong, even when considering Ukraine and Australia’s potential competition,” the report stated.
There is also strong demand for lentils and pulses, in general. “I believe we’re about to record an interesting period of growth. There is no doubt that plant-based proteins are gaining market share at the world level. We’ve seen investments in developing domestic processing here in Canada, which is good news for growers. The market in India seems to be opening up cautiously. Overall, the outlook is positive, especially medium to long term when it comes to pulses,” said Gervais.
In his report, Klemmer also notes pulse prices have improved “due to stronger demand and tighter supplies.” Lentils show upside, however pea prices are forecast to be slightly lower in the second half of 2020. Canola and spring wheat prices are “projected above the range observed lately, while durum is projected to trend sideways.” However, price forecasts for corn, soybeans and barley are down from the first six months of 2020. (Detailed crop outlooks can be found at fcc.ca/knowledge.)
More positive news is Gervais doesn’t see the Canadian dollar ending the year very strong. A low Canadian dollar is positive for margins where both livestock and crops are concerned. Additionally, he said interest rates should remain low for some time as the Bank of Canada has shifted to “forward guidance,” which means it is committed to keeping key interest rates at current levels (effectively zero to 0.25 per cent).
Farm financial fitness
To examine farm financial fitness, Gervais focused on Saskatchewan farm financial variables, which he indicated would provide a similar story across the other two Prairie provinces.
After a period of significant growth between 2005 and 2015, farms have had flat gross revenues for the past five years, which Gervais argued is an accomplishment given the weather challenges, transportation issues and trade issues with China. “There’s been lots of very specific trends and issues that have occurred in the last five years, and to be able to maintain that top line in gross revenues is an achievement,” he said.
If you look at a measure of net cash income, which is basically a measure of gross margins in Saskatchewan agriculture, there’s been a decline from a high in 2015 of more than $5 billion in terms of net cash income down to $3.5-$3.6 billion, said Gervais.
As farmers hold that top line, expenses continue to climb. However, farm input prices such as fuel and fertilizers have been priced lower due to the COVID-19 crisis. “With pressure on gross revenues, will lower farm input prices be enough to break the trend of downward pressures on profitability? That’s a big unknown,” said Gervais.
Overall, he said, we’ve approached the COVID-19 situation from a position of strength, but that strength has been “somewhat weakened recently” as a result of those pressures over the last five years.
Two lines of defence
In terms of farm financial health, Gervais said there are two lines of defence against financial risk: the first is your working capital, or your liquidity, and the second is the strength of your balance sheet. Generally, he said the first line of defence is still holding for Prairie farmers.
“No matter where you look, whether it’s the current ratio, interest rate coverage, amount of revenues or disposable income to cover your interest expenses and so forth … all of that line of defence has been weakening and are generally under the 15-year average — that first line of defence is still strong, but weaker than what it has been.”
Farm debt continues to grow, however, asset values have been growing as well, said Gervais, when considering the second line of defence: the strength of the balance sheet. “As you look at the debt-to-asset ratio in Saskatchewan agriculture (the other Prairie provinces will tell a similar story), we’re slightly below the 15-year average, so there are some equity gains but the pressures on profitability make the return on equity (very) low right now.”
Farmland values should continue to be steady, said Gervais. “I don’t anticipate a major impact in terms of farmland values.”
An updated report on farmland values was released on September 23, 2020, by FCC’s Leigh Anderson, a senior agricultural economist titled, 2020 Mid-Year Farmland Values — Affordability Improves with Growth in Farm Revenue. For the first six months of 2020, Canadian farmland values increased by 3.7 per cent on average. “Robust demand for farmland” will continue for the remainder of the year the report states, noting regional trends exist.
“Demand for farmland remains stronger than supply as producers continue to grow their operation(s)…. The pandemic created liquidity challenges for several operations, especially the livestock sector. This could weaken the demand for land in areas with a strong concentration of livestock activities. It is important to note that different regional trends exist. In markets that have experienced strong growth in recent years, we expect land values to remain flat,” stated the report.
“Farmland is expected to stay relatively expensive compared to gross farm revenues. Higher prices of grains, oilseeds and pulses, as well as strong export demand, could alleviate some of this pressure.”
For me, seeking out expert opinions is one way to change my own outlook about COVID-19 and has shifted my perception of our industry’s position on the world stage. I’m interested to know how COVID-19 has affected you and your farm. Please drop me a line at [email protected].
My best wishes to you for a fantastic fall season,