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Easing costs to support 2009 ag income: TD

Cooling energy, shipping and fertilizer costs, as well as a weaker loonie, are expected to support farm incomes in 2009, according to a new report on the Canadian ag industry’s prospects next year.

A “special report” from TD Economics, released last Thursday by Derek Burleton, TD Bank Financial Group’s associate vice-president and director of economic studies, predicts the weaker Canadian dollar will help cushion Canadian farmers against the impact of lower commodity prices in U.S. markets. It also expects the current credit crunch to ease over the next 12 months.

Farmers also shouldn’t expect U.S. crop prices to retest their recent highs anytime soon, although they’re expected to remain above their five-year averages during 2009, the report said.

The report forecasts U.S. wheat prices by the end of 2008 dropping 27.9 per cent from the end of 2007, and 10 per cent below 2008 levels by the end of 2009, but rising 11.1 per cent from late 2009 by the end of 2010.

Burleton also predicts “another challenging year” for Canadian livestock producers in 2009, despite easing cost pressures. U.S. cattle and hog prices are expected to drop 4.9 and 1.7 per cent respectively by the end of this year compared to the end of 2007, but to rise 7.8 and 18.2 per cent respectively from late-2008 levels by the end of 2009.

Six months

The report pointed out the stark difference between the ag industry picture today and six months ago. “It was only this past spring that world crop prices were soaring on the back of concerns about global food shortages, growing excitement about the use of food as a source of fuel and a surge in speculative financial investment in commodity futures markets.”

However, the report said, “fast forward six months. Food supply fears have eased considerably as this year’s global crop will exceed earlier expectations. And growing worries about the global financial and economic landscape have dampened expectations for both world food consumption and investment appetite for commodities. The huge gains in crop prices have evaporated even more quickly than they occurred.”

Burleton said there is “a good case to be made that the speculative element has played an increasingly big role in setting prices. According to some ballpark estimates, financial players — including commodity index funds, hedge funds and exchange traded funds — held as much as US$400 billion in commodity futures around the recent peak in prices earlier this year — roughly double its
2005 level.”

Of that amount, the report said, agriculture markets made up about US$50 billion to $120 billion and were also a “prime target.”

Recent price swings have prompted many to call for clampdowns on financial markets’ activity in commodities, with many farmers arguing such activity distorts market signals. Others, however, argue that financial markets’ participation “increased liquidity” in commodities.

Reduced speculation

“Regardless of changes made to regulations going forward, we doubt that speculators will jump back into commodity markets nearly to the same extent as in 2007-08,” Burleton wrote. “The commodity investment was driven by a mix of influences that are unlikely to be repeated to the same extent, chief among them include the perceived hedge against inflation, a substantial further drop in the U.S. dollar and a lack of other investment opportunities.”

While the recent dramatic declines in crude oil prices have dealt a setback to the ethanol boom that also helped spur crop demand in 2008, the recent easing of global food shortages has also helped push the “food versus fuel” debate to the back burner, Burlteon said. U.S. biofuel mandates and subsidy programs for ethanol production are in part expected to help keep prices above the five-year average.

“Tight spot”

Looking ahead for Canadian livestock producers, Burleton cites the federal government’s cull breeding swine program, as well as the arrival of mandatory U.S. country-of-origin labelling on food products from Canada and elsewhere, as leaving U.S. markets in “somewhat of a tight spot” as 2009 progresses, given the size of the U.S. market for Canada’s live hog and cattle exports.

However, the report said, “while higher U.S. prices normally spill over to Canadian prices, and particularly during a period of a downtrend in the loonie, the weakening demand stateside for Canadian hog and cattle exports will likely preclude a lockstep increase on this side of the border.”

Lower prices, lower costs

Generally, the price side is expected to be a “downward influence” on net farm incomes in 2009 relative to 2008, “especially on the crop side.”

However, the report said, the bottom line will gain some offsetting support from the lower loonie, crude oil prices down below half of their recent peak of US$147 per barrel, easing nitrogen and phosphate prices, “slackening” transportation and ocean freight costs, a “moderate easing ” in wage pressures as Canada’s jobless rate rises, and easing strains on credit markets as central banks and governments look to boost liquidity.

However, not all is clear on the longer-term horizon. There are concerns the U.S. government could become more protectionist after last Tuesday’s elections. Furthermore, “increasingly, the agricultural market is becoming global in scope,” the report said. “Yet Canadian farmers have been slow to take advantage of the potential of markets such as China and India, which are growing by leaps and bounds above that of North America.”

Expanded trade efforts, Burleton wrote, “will need to be backed by government moves to forge new bilateral trade relationships.”

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