THE GLOBAL ECONOMY AND
THE EFFECTS ON THE FARM GATE
by David Morris, Secretary, Ontario Corn Committee

According to Derek Holt, Assistant Chief Economist, RBC Financial Group, the greatest financial risks faced by farmers in the coming months and years do not come from factors related to the health of the world economy. Rather, they lie in the realm of politics and regulations. Trade disputes, government regulations (e.g. about water, nutrients, air quality, land use and property taxes) and global trade negotiations all have the potential to be far more significant in determining farmers' bottom lines than do global economic trends per se. For example, Holt predicted that the current Doha round of trade talks, essentially a political process, could bring about a fundamental realignment of international trading patterns for agricultural products. That, however, appears to be dependent upon developed countries following through on their promises to cut subsidies in return for easing of restrictions on market access and foreign investment on the part of developing countries.

With respect to the global economic picture, Holt said that the general outlook for the world economy is good. Overall, the world economy is expected to continue to grow at a modest rate without stimulating inflation. Because economic growth favours trade, the overall environment for trade should be positive. He went on to show that trading activity had recovered from the slump following 9/11 and that markets for Canadian products were becoming more diversified.

Holt drew particular attention to the effects of China's emergence as a major player in the world economy. China is no longer a closed shop. The Chinese government wants to see industrial expansion continue, so it has become outward-looking and has opened up to world trade and foreign investment. The Chinese economy has been growing at a rate of 8 to 10% per year and will likely continue to do so, fuelled by cheap labour, inexpensive hydro-electric power and vastly improved productivity. As a result of this growth, China has developed a huge appetite for commodities, especially metals and oil. Holt saw this as a positive factor for agricultural trade, as demand for agricultural products typically follows demand for industrial inputs.

Although Chinese demand for oil has been one of the factors driving up the cost of energy, Holt did not see this as particularly troublesome for the world economy. "On an inflation-adjusted basis," he said, "oil is still relatively cheap. It's nowhere near the record levels that we experienced in the 1970's." He also indicated that he believes that the price of oil will moderate, over the coming months, back to the $40 per barrel range as anxieties about supply eases.

In regard to the economic picture for our largest trading partner, the U.S.A., Holt was not as concerned as some analysts have been. The U.S. economy has rebounded well in 2004, he noted. Although the rate of growth in the U.S. is expected to moderate in the coming year, Holt saw that as a positive factor, because it will dampen inflationary pressures. And while the continuing increases in the U.S. trade deficit, budgetary deficit and government debt are not desirable, they are not at crisis proportions.

Closer to home, Holt expects the Canadian economy to continue to grow at a modest rate. He sees prospects for Canadian commodities as being strong, except for grains and oilseeds. For these, he offered little hope. He commented that a major factor in the currently dismal crop prices has been the strength of the Canadian dollar. Although he expects our dollar to remain relatively strong, relative to the U.S. dollar, he feels that the "worst is over" with regard to further increases in value. Interest rates in the U.S. are predicted to rise faster than those in Canada. Higher rates in the U.S. will tend to pull investments there at the expense of our currency. Holt also noted that our high dollar will mean that we export less and import more. Again, this will tend to curb the value of our currency. In sum, Holt expects our dollar to retreat to the 77 cent range. He cautioned, however, that some other analysts have predicted that it could go as high as 90 cents. He suggested that people who cannot tolerate the risk of that happening might want to consider hedging against it on the currency exchange.

Holt also pointed out that the Canadian dollar is strong only in relation to the U.S. dollar. As the Canadian dollar increased in value relative to the U.S. buck, so too did almost all other major world currencies, In fact, most of these outperformed our dollar. As a result, our exports remain attractive to buyers in these countries. Taking advantage of that, however, will mean a shift in our traditional trading patterns.