by Len Kahn, founder, Kahntact
In our 2022 Nourish Network Trend Report released last November, we tackled the question of whether the Canadian farm economy was vulnerable to a downturn driven by external forces. The main concerns were macroeconomic uncertainties and supply chain disruptions associated with the fifth wave of the COVID pandemic.
Since then, war in Ukraine, which was on the horizon but thought to be extremely unlikely, combined with the sixth wave of COVID, has thrown world markets into even deeper turmoil.
So what might this mean to the Canadian farm economy, and how are Canadian farmers faring? Let’s take a look.
Hope springs eternal among Canadian farmers
First, despite April blizzards in parts of Western Canada and Northern Ontario, and even in the GTA, spring has, in fact, arrived. And for farmers, spring is invariably a time of optimism. A time for calving, seeding, spraying and dreams of bumper crops — and a ton of hard work in a very short time. All the while watching the weather and markets on an hourly basis. I surveyed a few farmers over the past week, and while acknowledging the greater than usual uncertainty and churn this year, most retain a positive outlook for the coming season.
Canadian farms are predominantly multi-generational family-run enterprises. Paraphrasing a popular Farmers Insurance TV spot, the elder generation, in particular, knows a thing or two because they’ve seen a thing or two. So while this year’s challenges may seem more significant than some, for the most part, our farmers are taking things in stride. One way or another, the crop will get into the ground, inputs will be applied, and harvest will happen. In other words, at field level, it’s very much business as usual.
Having said that, the war in Ukraine has certainly amplified some of the concerns we identified back in November but also provided some significant upside for farmers.
Rising interest rates aren’t a worry — yet
As anticipated, Canadian interest rates have risen over the past six months. The benchmark Canadian prime rate has gone from 2.45% in November to its current level of 3.20%. The impetus for this move is the Bank of Canada’s attempt to keep inflation in check.
For farm businesses, the effects will likely be negligible for the 2022 crop year. However, continued rate hikes can be expected to increase borrowing costs down the road, potentially affecting purchase and financing decisions heading into 2023.
Inflation is driving up costs and revenue
Canada’s month-to-month inflation rate has risen dramatically over the past twelve months, from just over 1% in January 2021 to close to 6% today. Inflation can have dueling effects on farm income. On the one hand, increasing commodity prices can help increase revenue at farm level. For example, the export value of Canadian canola seed was around $535 per tonne in March 2020, just as the pandemic was unfolding. Today the same tonne of canola is worth over $1,100. Great news for canola growers, right? Well… partially.
At the same time, the cost of key inputs, including fertilizer, crop protection products, and fuel, has been steadily on the rise. For example, Fertilizer Canada reports a typical grain farmer would have spent $60 to $65 per acre on fertilizer in 2021. For 2022, this has more than doubled, to $130 to $140 per acre. Statistics Canada reports that for the average farm of 778 acres, that means an increase of about $56,000.
The net effect for many farmers still seems to be positive, but inflation on the farm input side is another factor that will affect farm profitability this year and into 2023 at least.
Input shortages — including rain — may not be as impactful as you might expect
Over the past two growing seasons, one factor that has emerged is periodic shortages of certain inputs, including fertilizer and crop protection products.
As Darren Dillenbeck, country manager for FMC Canada, notes, “It’s popular right now to talk about ‘unprecedented times,’ and in some ways, the current situation is different than what we’ve seen in the recent past. However, the fundamentals are pretty much the same. We do see anxiety driving some purchase decisions. As news and rumours of shortfalls have spread, the concern around product availability increases, and, in some cases, more product is ordered than may be needed in anticipation of a future shortfall.”
Dillenbeck adds, “Although farmers have seen shortfalls in some products, I think if we had a true picture of inventories out in the field, we would find we are not as far off past total product availability needed to grow a crop in 2022. It just may not be in all the right places at the right time, forcing farmers to make trade-offs.”
Net net, the war in Ukraine is likely to have a positive effect on the overall Canadian farm economy (abstracting from the horrific toll the war is taking on the Ukrainian people). Ukraine is one of the world’s largest wheat and barley exporters. Absent a speedy resolution to the current conflict, world grain prices are likely to rise, benefiting Canadian grain producers — while also disadvantaging livestock producers who will see higher feed prices.
And while drought remains a concern in parts of Western Canada, even an average growing season, combined with rising commodity prices, likely means a bumper year for Canadian farmers.
That we seem poised for a robust Canadian farm economy in 2022 is a testament to the adaptability and resilience of our farmers and the Canadian farming industry. Now, if we could just ditch this snow for a few months!