Is the Fish Stinking? Canadian Bank Profits Give Clues of Future Agricultural Demand
I read with interest DTN’s senior analyst Darin Newsom’s account of his recent Brazil trip where he mentioned something about soybeans having a price which may start with $6 this coming spring. It was an interesting comment to a Brazilian audience and one that Darin said caused quite a ruffle in the Brazilian agricultural media. I had thought the days of $6 soybeans were all over.
Let’s hope it is. Needless to say, reading Darin’s account got me thinking about where we are today based on where we’ve been over the last year. For instance if you remember last year at this time we were in the early stages of the commodity freefall. Corn was falling from the $7 mark and soybeans were coming down from $15 a bushel. As September rolled around we hadn’t even got caught up yet in the AIG and Lehman Brothers fiasco. Of course after it was all said and done whether that be Christmas time or whether that be January or February it became conventional wisdom that the nonfarm economy was so bad the impact on agricultural demand would seemingly take forever. I told readers that maybe they should settle back until mid-2010.
It hasn’t quite worked out that way. For instance, Canada’s unemployment rate is still at about 8.6%, which is much higher than the 5.8% we were at in 2007 in early 2008. It also seems that the sky isn’t falling anymore like it seemed to be back in late 2008 in early 2009. In fact in Canada as you read last month in this column the Bank of Canada said that the recession is actually over. Of course the proverbial question is who is right, where are we now in terms of our economic status and how will this impact agricultural prices as we look into the next 12 months?
What I really want to say is there something not quite right about this recession and how it has affected the farm economy. Or in other words is the fish stinking a little bit? I say that for a couple reasons. The first reason is that there are some segments of our economy, which are thriving at a time of deeper recession. That sector of course is the Canadian banking sector, which all Canadians have come to loath. In this sector the Royal Bank of Canada and the National Bank of Canada reported record profits for the third quarter and the Toronto Dominion Bank topped many analysts estimates. The Royal Bank of Canada, which is Canada’s largest lender, had net income rise 24% in the third quarter to 1.56 billion Canadian dollars. The Toronto Dominion Bank, the second-largest bank in Canada had earnings, which actually fell 8.5%, but they still had a third-quarter profit of C$912 million.
The question I have is what’s up with this? Yes, Canadian banks have been healthier than almost any other banks in the world and this is been a good thing for the Canadian economy. Apparently our banks are benefiting from a relatively strong Canadian resale housing market. Mortgages are flying off the shelf.
At the same time last week I found myself in New York City. On the tour I took the American tour guide made sure that he pointed out a building owned by a large American healthcare insurance company. With our American friends in a constant argument these days about American health care, he made sure to point out the gold plate on the building. He was obviously thinking we shouldn’t be having a debate about health care in this country; it’s more about the fat cats in those buildings amid this recession.
So if you take those two examples, one the Canadian banks and two, the American healthcare industry, does it give us clues about future agricultural demand going forward into 2010 and in 2011? I think so. It’s pretty obvious to me that some of our pillars of the economy like our banks and our insurance companies make money despite it all. No matter how you might find that repugnant, it does give a positive clue to future burgeoning food demand amid worldwide global economic recovery. Last year at this time banks and insurance companies were vaporized. This year some are making record profits.
So does that mean I’m predicting $20 soybeans and $7 corn for late 2010 in early 2011? Well, not so fast. Keep in mind though I think this fish is stinking a little bit now. It’s no longer the summer of 2008, in fact it’s no longer the winter and spring of 2009. Our greater economy is changing now and it is changing in a way, which should spur agricultural demand into late 2009 and all of 2010.
That doesn’t change the commercial fundamentals within our grain marketing structure. We are still staring at the second-largest corn crop ever and ending stocks pushing 1.6 billion bushels. However, those Canadian bank profits are a sign of things to come and it will surely manifest itself in getting back some of that burgeoning global food demand which we had in 2007 and early 2008. At the end of the day with this big crop almost in the bin, we’re going to need that.