Oil Price Plunge: A Twisted Challenge for Canadian Agriculture

Oilprice 510     As many of you know through the years I have commented on many of the policies of the Bank of Canada and the US Federal Reserve.  Alan Greenspan, Ben Bernanke and Janet Yellen are my friends.   Before that, there was David Dodge, Mark Carney and now Stephen Poloz at the Bank of Canada.  These people really affect our interest rate policy and have a direct impact on the welfare of farmers.  It just so happens that your loyal scribe has an uncanny resemblance to our current Bank of Canada governor Stephen Poloz.  This came up this past week as I was making comments on the energy markets.  Phil, are you related to this guy came the query?

I’m not related but I wouldn’t mind his job.  Could you imagine me as a governor of the Bank of Canada with my levers on the Canadian economy?  Yes, it would be my dream job, but I will leave that to my body double Stephen Poloz.   He surely has his work cut out for him as oil prices have rocked the global and Canadian economy.  We will see what his next move will be.

I say that in an environment which is radically changed from even a few months ago.   Last June 25th we saw the price of crude oil at $102 a barrel.  Today oil actually dropped under $60 a barrel finishing at $59.11/barrel.  The decline in oil prices have came too late to fill combines and tractors for this past cropping season with cheaper fuel.   However, it usually takes about $175 to fill my F-150 pickup, but now it gets filled for $110.   Who knows, maybe in another couple weeks it will be down to $90.  It’s a bonanza for motorists who have jobs because they suddenly find money jingling around in their pocket to spend on other things.  However, it is quite a nightmare for governments around the world who rely on oil revenues like Canada does.  Where we once were going into a fiscal surplus, now it’s going to be just so much more difficult.

In Canada we have been expecting a rise in interest rates possibly in 2015 and almost surely in 2016.   This is partly because we have been expecting a rise in American interest rates as their economy continues to grow.   The Canadian economy has been doing fairly well and the thought was that eventually interest rates would rise.  However, today Norway, a major producer of oil actually cut interest rates by one quarter of a percentage point.  The reason given by the Norges Bank Governor was to defend against a severe downturn in their economy after the 40% drop in the price of oil over the last 6 months.  I don’t know if it will be repeated here, but it is a great example of how economies drunk on oil can get in big trouble when those revenue projections go awry.

Implications in Canada are completely obvious to anybody in farm country.  Western Canada might be built on agriculture, but oil has made Alberta and Saskatchewan boom.   Western Canada has been a magnet for job growth in this country and is a symbol for growth in the region.  It also serves as a huge tax source for the federal government with wealth redistributed throughout our country.  So when we have a 40% decrease in those revenues on top of lower basis values for oil at the wellhead in Alberta and Saskatchewan, it’s rocking our world.  You can bet that there is tremendous nervousness about this in Western Canada as well as in the offices of finance minister Joe Oliver.  Keeping this country out of fiscal deficit just got a lot more difficult.

For government that will make everything much more difficult, infrastructure spending, agricultural spending, spending all kinds.  On the other hand the money didn’t just disappear somewhere, for the most part it remains in people’s pockets through lower fuel costs.  However, even that gets messy.  Simply put, our fiscal plans in this country are built on the back of high-priced oil.  That’s gone at least for the moment and it’s going to change our whole Canadian economy.

The immediate tangible positive for Canadian grain prices has to do with the falling loonie currently at $86.60 cents US.  That has boosted Canadian cash grain and livestock prices.  It was unexpected, just like a 40% drop in the price of oil and it means volatility for Canadian farm prices is back with a vengeance.  Is so unpredictable.

The challenge for Canadian farmers is to somehow take advantage of this drop in oil prices despite all the negative consequences for many around us.  I’ve often said that higher oil prices are good for farmers because of our burgeoning biofuel sector.  However, it is always a double-edged sword saying that.  It is almost like picking your poison.  Nobody in farm country likes high fuel prices and biofuels have been an integral part of that paradigm.

So as we round into next week keep your eye on those energy markets.  We all know that world has changed and with it so will we.  Our Petro-Loonie is certainly feeling it.   What did I say; change is our only constant in agriculture.   In 2014, we’ve had it in spades.

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