China’s economy is slowing down or at least its rate of growth is. However, those in the agriculture sector shouldn’t be concerned about the impact here at home, according to Farm Credit Canada’s chief agricultural economist.

“We monitor China all the time, but especially a week ago when they released their numbers for GDP growth,” said J.P. Gervais. “It triggered a bunch of stories about how China is slowing down, and this is bad, and overall this is not a good thing.”

But Gervais disagrees with that assessment.

While China’s GDP growth of 6.8 per cent last quarter is lower than recent years and the previous quarter — and far below the 1993 peak of 15.40 per cent — the economist believes that GDP doesn’t provide the whole picture.

“What does it say really? Not much,” Gervais said. “We should not be focusing on GDP when we’re in the ag sector.”

What is key for agricultural producers and exporters is how much food Chinese consumers buy, how much they spend on it, and how much food China is actually producing.

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“Disposable income is perhaps a statistic I look at more carefully,” said the economist. “And when you look at disposable income in China — the money that consumers have to spend on food — it’s still growing at a rate of over nine per cent a year and inflation is low. So there is no doubt in my mind that consumers have more money to spend on food now.”

For years now, the diet of Chinese consumers has been improving as more disposable income and a changing social landscape increased the consumption of meats and proteins, which usually means an increase in agricultural imports.

And while China has reduced some imports — like dairy — over the last couple of years, Gervais is quick to point out that is the result of production issues, not an economic slowdown.

“That’s because of the overproduction of the last couple of years. It’s not a demand issue, it’s a production issue. They are also importing fewer feed grains, but again, it’s because of the overproduction of the last few years,” he said. “And that is going to change, they are still importing a lot of oilseeds and lot of corn.”

Oilseed and corn imports have actually picked up over the last six months, he added.

What the slowing rate of GDP growth does show, is that the country’s demand for investment has been reduced.

“The biggest risk for me is to see China not slow down fast enough,” Gervais said. “When you think about investment 10 years ago or over the last 10 years, you would go ahead with investment projects that were easy to identify… but now, China has sort of picked all of the low-hanging fruit. So if it wants to keep having a good return on the investment, then China needs to pick more risky projects.”

Not surprisingly, risky projects come with a lot of risk and uncertainty. Gervais also noted that as sure investments such as infrastructure projects disappear, new investments will become more reliant on borrowed money and increased debt.

But as growth slows and China’s economy moves away from an investment-heavy model, risk is decreased and ensuing stability helps allow consumers to retain and grow purchasing power.

“I realize it’s not as positive for other sectors, but for the ag sector I think it’s actually positive,” he said.

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“Loans for farm machinery and equipment held at high levels with a sharp jump in the volume of intermediate-term loans,” the bank said in its survey, which included national statistics from a Fed survey of banks from the week of Feb. 6.

Total U.S. agricultural loans reached $79.1 billion in the first quarter of 2012, up from $62.8 billion for the same period a year ago. Farm machinery and equipment loans hit $6.9 billion, near the peak demand of $7.1 billion in the first quarter of 2011.

Agricultural banking assets and balance sheets are closely monitored by economists and bankers at the Federal Reserve and by commercial bankers to gauge the health of the rural economy and money supply.

U.S. Agriculture Department projections estimate U.S. farmers’ net assets will rise above $2.2 trillion in 2012, as grain farmers, buoyed by exports and ethanol continue to retire debt, expand land holdings and upgrade equipment including: combines, planters, on-farm storage bins and irrigation systems.

The outlook adds up to good demand from suppliers such as John Deere and many others.

Non-real-estate loan volumes rose 26 per cent compared with last year, driven by a spike in intermediate-term, large loans for unspecified “other” purposes, the Fed said.

“With low cow inventories lifting feeder cattle prices, banks also made larger short-term loans to the livestock sector,” the U.S. central bank said.

Commercial loan demand from farmers may be understating strength of their buying, as many are buying with cash. Loans direct from the suppliers may also be trimming the need for private bank loans.

Overall, strong farm income combined with record farmland prices — up as much as 40 per cent last year despite the large number of farms for sale — kept loan demand from crop producers flat heading into the planting season, the Fed report said.

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With food and drinks exports rising by close to a billion euros a year and food firms among the best performers on Ireland’s bruised stock market, agriculture is one of the few sectors to survive a devastating property collapse.

“A few years ago people thought you were insane if you went into farming,” said Slattery, 25. “Now there’s definitely money to be made.”

The government has climbed on the bandwagon, citing food and agriculture as a route back to growth, although experts warn expectations are inflated as the sector is highly dependent on EU subsidies and exports are skewed towards struggling European markets.

Construction’s poor cousin

Food and agriculture was a poor second to property development, banking and high tech during the Celtic Tiger decade to 2007, and lenders had little time for farmers upgrading their milking equipment.

But after the property bubble burst, bringing much of the economy down with it, the food sector was suddenly the safest bet in town.

“Now everyone is sitting up and taking notice of the agri-food sector,” said Jim Power, chief economist at financial firm Friends First.

While homebuyers and small businesses found it all but impossible to get credit this summer, leading lender Bank of Ireland boasted it was approving 85 per cent of loan applications in agriculture, fishing and forestry. Equities investors are equally enthused, driving food company stocks higher.

Key to recovery

The agri-food sector is worth around $32 billion and the government expects agribusiness exports to grow by 50 per cent to $16 billion by 2020, fuelled by food processing and the phasing out of production caps on dairy products, which is expected to boost dairy exports.

The government is also encouraging farmers to switch to higher-value commodities, to invest to boost productivity and to look at high-value artisanal food products. Still even if the strategy succeeds, agriculture would likely amount to no more than 10 per cent of annual economic output, said Power.

“It will be one of the stronger growth areas, but it is not going to result in a GDP bonanza,” said Power. “It’s not going to drive a new Celtic Tiger.”

Up the value chain

Irish farmers remain heavily dependent on commodity prices and have had limited success in moving up the value chain, despite a mini-boom in the number of artisanal producers.

“There are some farmhouse cheeses and organic yogurts, but there is not a huge amount happening,” said cereals producer Clemens Von Ow.

“Farmers here have been very weak at vision and marketing.”

For the moment, dependence on commodity prices is not a problem, and farmers joke that girls have started talking to them again at rural discos.

But even with the high prices, farmers’ net incomes last year were roughly equivalent to subsidies received, meaning they would just be breaking even without support, according to a recent government report.

Dairy farmer Slattery admits he was planning to do some part-time accountancy to ensure his financial stability once his farm is up and running.

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Some analysts have blamed the fed’s quantitative easing for flooding the global economy with money and helping to drive prices for food and other commodities higher.

“It’s entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries,” Bernanke told an audience at the National Press Club in Washington.

Policy-makers in a number of emerging markets have also argued the fed’s easy monetary policy has undercut the U.S. dollar and sparked a potentially inflationary flood of private capital into their markets.

Bernanke repeated that the U.S. central bank’s monetary policy is aimed at stimulating domestic growth, adding that no one could argue the U.S. economy was overheating.

The UN Food and Agriculture Organization Food Price Index on Thursday touched its highest level since records began in 1990 as rising food prices showed no sign of relenting, prompting concerns of social unrest.

“Some of the emerging markets are facing inflationary pressures because their own economies are growing perhaps even faster than their capacity,” Bernanke said.

He said higher food prices were stoked by increasing consumer demand in emerging economies for goods such as meat.

“As people’s diets are becoming more sophisticated and as they eat more beef and less grains and so on, the demand for food and energy rise, and that’s the primary long-term factor affecting the real price of commodity and food,” Bernanke said.

Still, some economists were skeptical.

“We do not find credible Bernanke’s assertion that the rise in equity prices, narrowing in corporate bond spreads, and rise in inflation compensation in the Treasury market are a result of (fed policy), but the rise in commodity prices is unrelated,” said John Ryding and Conrad DeQuadros, of RDQ Economics, in a research note.

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Sheila Bair, chairman of the Federal Deposit Insurance Corp., said it was important to monitor U. S. farmland values for signs of instability like the price bubbles in the housing and stock markets that burst with disastrous consequences for many investors.

Farmland values remain 58 per cent above their 2000 levels in inflation-adjusted terms. Investors have been snapping up high-quality land in the Midwest where row crops like corn and soybeans are grown as well as orchards for high-priced nuts and berries along the U. S. West Coast.

While commercial and residential real estate prices have fallen sharply, farmland valuations have remained strong during the recession. But Bair said those “positive fundamentals” could change.

“A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation’s 1,579 farm banks,” Bair said in a speech delivered to a risk management group in Baltimore.

“While the credit structure underlying U. S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring,” she said.

Bair is a member of the newly established Financial Stability Oversight Council made up of the Treasury, the Federal Reserve, the FDIC and other financial regulatory authorities. FSOC held its first meeting on Oct. 1.

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Excerpted from “Avoiding Recession Contagion: Manitoba Economic Profile and Forecast” published last month. The full report can be viewed at: http://www.cwf.ca.

Just as the careful approach followed by Canada’s banking system helped it escape the global financial meltdown, the balance in Manitoba’s economy allowed it to avoid the recession contagion and, according to many analysts, stand out as the only province in Canada to post growth in 2009.

Canada West Foundation estimates that Manitoba’s real GDP edged up 0.1 per cent in 2009, and forecasts that it will grow 1.9 per cent in 2010. It is in times like these that Manitobans should remember that there is a benefit attached to having an unspectacular economy, with its moderate ups and downs.

After all, who would argue against the case for getting rich at a slower pace and keeping your job, when the alternative is getting rich fast but occasionally facing sudden job losses? This is exactly what happened in 2009 in Manitoba, where despite a brutal 18 per cent drop in international exports and an 11 per cent decline in manufacturing shipments, there were no net job losses and the unemployment rate remained the second lowest in Canada.

Meanwhile, the rest of the country was doing far worse.

IN CONCLUSION

Although Manitobans should be happy about this, many think that the “balanced” moniker has been used too often in the past when describing the province’s economy. According to them, it makes Manitoba come across as bland and boring.

Well, 2009 proved that bland works: Manitoba escaped the recession, albeit barely, and compared to other Canadian provinces, it did well. The first reason for this is the obvious one, industrial diversification. Manitoba has a number of sectors which from one year to the next take turns pulling the province towards prosperity.

Manufacturing and finance come at the top of the list (someone has to be) but they both manage to contribute to the province’s growth without overwhelming it.

Manitoba also benefits from significant commodity-centred industries such as crops and mining, but they do not dominate the provincial economic landscape nor hinder the provincial government’s policy range of action during the odd times when their prices decline. Low commodity prices are bad news for entrepreneurs and employees, but they don’t bring all of Manitoba down with them.

Finally, Manitoba has a solid portfolio of public projects underway. With the exception of the Red River Floodway, none of them are extraordinarily large or overpowering.

Other provinces in the West would love to be in Manitoba’s situation. Alberta, where almost one-fifth of the economy is tied to the oil and gas sector, faces both the positives and the negatives that come from having a lot of eggs in one basket. Saskatchewan last year saw potash and uranium prices go through unexpected declines, turning a potential banner year into a worrisome one. And in B. C., many are saying “now what?” following the simultaneous completion of a handful of large Olympic-oriented construction projects.

While their western neighbours work hard at weighing public policy choices that will compensate for whatever balance is missing in their economy, Manitobans are starting to realize that, in their case, the right choice is to be happy with steady if not spectacular growth and stick to the balance that brings it. This could very well keep recession bugs away next time around, just like it did last year.

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“Climate change increases child malnutrition and reduces calorie consumption dramatically,” said a report from the International Food Policy Research Institute, part of a global network of agricultural research centres.

For the average consumer in a developing country, IFPRI said, “calorie availability” will decline by seven per cent compared to 2000.

Higher temperatures reduce crop yields while encouraging pests and plant diseases. South Asia and sub-Saharan Africa will be hurt the hardest by declines in yields and production, IFPRI said.

It recommended an increase of $7 billion a year in public-sector spending on agricultural research, improvements in irrigation and farm-to-market roads to offset the impact of climate change.

“I think we will see significant increases in resources for this purpose,” said Gerald Nelson, IFPRI senior research fellow, during a telephone news conference. He said there was growing recognition at climate talks that agriculture would be affected greatly by climate change.

Research to enhance crop and livestock productivity, “including biotechnology, will be essential to help overcome stresses due to climate change,” said IFPRI. Nelson said biotechnology “is one option” but not the only approach for researchers.

World leaders have pledged more than $20 billion over three years to increase agricultural production in food-short nations.

For its report, IFPRI used two climate models to project grain and meat output in 2050. Both models call for higher temperatures but differ on how much precipitation would increase. One has higher temperatures and precipitation in China and the other has more rainfall in sub-Saharan Africa, for example.

“There is almost no difference in calorie outcome between the two climate scenarios,” IFPRI said.

For almost all crops, South Asia would see the largest declines in crop yields. IFPRI said rice output in South Asia would be 14 per cent lower than if there was no climate change.

In sub-Saharan Africa, wheat, rice and corn (maize) yields would drop by 34, 15 and 10 per cent respectively, IFPRI said.

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But treasurer Bob Hunsberger reported that it’s on the mend, that revenues and expenses in the balanced budget for the current fiscal year were on target during the first quarter and the investment portfolio has made gains to $2.4 million.

The centre, which is Canada’s only independent think-tank for agriculture policy, lost $722,422. The investment loss was $548,933. Another big-ticket item was buying out the contract of its chief executive officer, but no specific figure is revealed in the annual report.

During the annual meeting, Douglas Hedley was introduced as the newest addition to the board of directors and Dan Laplain as a new associate, working with the Value-Chain Management Centre.

Hedley retired about five years ago as assistant deputy minister for financial services for the federal Agriculture Department. He is an agricultural economist and continues to work as a consultant and for the deans of Canadian veterinary colleges.

Laplain spent his career in quality assurance, including in the aviation and food industries. He has worked recently for Cavendish Farms, which is one of the potato-processing companies that dominates that sector.

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A drop in commodities prices and slowdown in the farm sector in the third quarter of 2008 expanded into slowed manufacturing and agricultural-related services in the fourth quarter, and conditions have grown worse in the first two months of 2009, said Jason Henderson, the Federal Reserve’s lead agricultural economist in an interview on March 4.

“The recession has now caught rural America,” he said.

Henderson has been surveying banks and will release an updated annual rural economic outlook in the next few weeks.

While rural lenders are largely faring better than their commercial counterparts in metropolitan areas, they are experiencing increased delinquency rates and increased charge-offs as customers are unable to pay back debt, said Henderson.

“That is raising concerns,” he said. “Everybody is taking a watchful eye. Rural banks are still doing much better than their counterparts in the rest of the country … but we are going in the wrong direction.”

For the third quarter of 2008, small community banks reported an average return on assets of 0.3 per cent, down from 0.7 per cent a year earlier, he said.

Increasingly, rural lenders are working to tap funds through the $700 million federal Troubled Asset Relief Program (TARP). And they are tightening up on extending credit, raising collateral requirements and general credit standards, Henderson said.

Henderson’s comments follow a report issued March 3 by PayNet Inc., which collects real-time loan information from more than 200 leading U. S. Capex lenders, that said severe delinquencies – accounts behind 91 days or more – for farmers jumped 82 per cent year over year in January to 1.20 per cent.

Henderson said farmers have been particularly hurt by weak demand for corn-based ethanol, a decline in export demand and a shift by consumers away from dining out and from purchasing more expensive protein products, such as high-end beef.

Rural unemployment is also on the rise, increasing by 12.5 per cent from November to December to 7.6 per cent. Rural counties lost 282,000 jobs in December alone, according to a publication of the Center for Rural Strategies based on figures from the federal Bureau of Labor Statistics.

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“Regulation is back and it’s time it was,” he told the annual meeting of the Chartered Institute of Logistics and Transportation in North America. “We have learned that unabashed reliance on market forces isn’t the answer.”

While a return to much of the old government regulation isn’t called for, he said the financial pressure on carriers raises real questions about how well they perform their safety responsibilities.

“A sustainable transport system requires swinging back to more government intervention. Market forces have an important role to play in shaping transport policy but the government has responsibilities as well,” he said. Inspecting the safety procedures of carriers and their suppliers is among them. “Government has to be a partner to ensure the safety of the system.”

Although most of his remarks were aimed at transportation companies, he said the Big Three North American automobile manufacturers had dragged their heels for decades in collusion with the petroleum companies on producing small, fuel-efficient vehicles. Governments shouldn’t bail them out until they change their ways.

He said he had reservations about the scope of government deregulation when he was a senior minister in the Chretien government but went along with his colleagues and senior bureaucrats. He also wasn’t happy with budget cuts that forced government departments to withdraw from many of their safety inspection functions.

He complimented former transport minister Lawrence Cannon tackling rail safety after a string of serious accidents and praised the work of the Lewis task force. “More government oversight is needed to ensure the rail system remains safe.”

Governments should continue to invest in transportation infrastructure development because Canada has to be ready when the global economy recovers, Mr. Collenette said. The government could even consider taking an equity position in troubled carriers and selling that stake in better times.

Second guessing the wisdom of government economic deregulation is easy to do in the current financial market turmoil, Mr. Collenette admitted. But he’s not alone. He noted that Bob Crandall, the former head of American Airlines and one of the great champions of deregulation, is now of the opinion that some re-regulation of the airline industry is needed.

It also should be remembered that government had an historic role in transportation development in Canada especially in building canals, railways and airlines, he said. He lauded Paul Tellier and Rob Ritchie, the former presidents of CN and CP, for understanding their companies “had to ensure the country was well served.”

Mr. Collenette also suggested the government should reconsider its airport rental policy, which he blamed Finance Department officials for, because it sucks billions of dollars out of the airports every year and results in high costs for the airlines using them.

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