With COVID-19 vaccines rolling out for worldwide distribution and immunization on the horizon, now hopes turn to putting the virus in the rear-view mirror and rebuilding a battered global economy.
That’s almost certainly going to mean enduring a sharp recession, says J.P. Gervais, chief economist for Farm Credit Canada. Speaking at the virtual Manitoba Agronomist Conference earlier this winter, he outlined what that means for the economy generally, and agriculture particularly.
“We know we’re going to get a recession in Canada and then a global recession of high magnitude,” he said. “But this is something unlike other recessions. We’re shutting down the economy for public health reasons.”
It’s a voluntary recession, perhaps the first of its kind and, since policy-makers walked into it open eyed, they hope economies can walk out of it and spend the next couple of years working toward a full recovery. There are a few different ways that growth may occur over time, all dubbed by the charts depicting them and the resemblance to letters of the alphabet.
“At the outset of the recession we had an alphabet soup of different scenarios,” Gervais said. “You can make an argument that it’s going to be relatively easy and fast to reopen the economy and you’re going to get this V-shaped recovery where you have a big, big drop in economic activity and then a fast recovery.”
If the recovery is more sluggish the bottom of the curve might resemble a U-shape. Another possibility is a sudden drop, a partial recovery another drop and then a trend upward, the W-shaped scenario.
“And finally the debate was also to avoid an L-type recovery,” Gervais said. “Decline, growth again but never getting back towards where we were prior to the pandemic because of long-term damages to the economy.”
However the recovery structures itself, it’s going to take a couple of years. We’ve seen a drop of around five per cent in Canadian GDP, which is larger than what we saw in 2008-09. A hit that big presents an obstacle to returning to growth and full employment.
“So you can understand the magnitude of this,” Gervais said. “The point is that by the end of 2021 most forecasts are saying that we’re not going to get back to where we were pre-pandemic. To bring us back to where we were prior to the pandemic we would have to grow by more than five per cent.”
How things play out for the Manitoba farmer will depend on a handful of macro variables — interest rates, the value of the loonie, and worldwide demand for what they grow. World demand is, of course, a function of the health of the world economy and there may be some bright spots.
“China is in a unique spot, the only significant economy in the world that’s not going to record a decline for 2020 partly because that pandemic hit them a little earlier than us,” Gervais said. “I think the picture looks positive for China and I think, later on, it’s going to have a positive impact overall.”
He also mentioned India, another country that managed the virus fairly well. It will continue to be a big customer for Canadian pulse crops. There’s also a hope for pent-up demand among people who haven’t been out spending money on food and beverage services such as restaurants. While this has been bad news for the food-service industry it’s been good for grocery retailers.
Then there’s the cost of money itself. Gervais says interest rates are low and doesn’t expect the Bank of Canada to raise them until 2022.
“The bottom line is that interest rates have been coming down and will remain low for some time,” he said. “I think it brings a bit of relief to operations with the level of investment and some of the expansion that we’ve seen on some farms as well as the level of debt that some farms carry. I do think that that’s actually a positive picture.”
Demand is key
Perhaps the brightest spot for Manitoba farmers is the durable demand for what they’re selling.
“It is really amazing to see the demand for what we sell,” Gervais said. “Even with some production challenges global demand right now is so strong throughout the world. If 2021 ends up being a good year, I think we’re going to be all right at the farm level.”
All told this depends on prices, future markets and, of course, the weather. One of the major drivers, according to Gervais, is a reset in the animal protein market with China. The Chinese economy wasn’t affected by the downturn as badly as the rest of the world so they are better off economically.
“The more China is able to avoid this economic downturn and then recover and rebound as fast as possible the more likely it is to have a positive influence on commodity prices and on the profitability of Canadian farms,” he said. “After ASF, China is successfully rebuilding its herd to increase pork production. Part of the impact is that it drives a huge amount of the export to soybeans and corn.”
And that will likely pull along other crops and agriculture commodities in global markets. Part of that is the Phase 1 deal between China and the U.S., but at the end of October they were 44 per cent off target. The pace of exports is slowing down so that’s something to watch going forward.
“There’s been an upward pressure on wheat prices but now there are some of the concerns coming out of Russia as to whether or not they’re going to be able to meet their export target and meet their customers’ needs,” he said. “Because of their own food security issues they’d like to restrict their exports so that their domestic price for wheat doesn’t climb too fast.”
This has had an impact on an uptick in pricing on wheat futures, so he says some overall pricing is a bit more positive than what we saw at the outset of the pandemic.
“If you look at canola it’s been a market going between $425 and $475 a ton and right now we’re flirting with $600 a ton,” he said. “It’s been a pretty significant development so what this is doing is actually making some assumptions about yields, making some assumptions about prices for the 2020 crop.”
Another factor is the upcoming crop in South America and how it fares with the weather. What’s produced in the Southern Hemisphere will affect what prices are here. He also made some observations about expenses.
“In some cases they face lower input prices but overall I expect a bit of inflationary pressure on expenses,” he said. “It’s a bit of an unknown what it’s going to look like by the end of 2020 but there’s no doubt in my mind that farms may see higher revenues. And I do expect the Q4 to show an increase in overall revenues for 2020 and with strong pricing we have the ability to lock in some of the strong prices into 2021. You expect that’s also going to sustain revenues for 2021.”