At the time of the major market meltdown in the late fall of 2008, I was grasping at straws for knowing what to do.  For instance when Lehman Brothers went down it was so stunning I was wondering out loud if Canadian banks were at-risk.  I think I was right to think that but the best prediction I can put out was we might see some economic recovery in late 2010.  I certainly didn’t have the chutzpah to say we’d see a 60% rise in the stock market from its low last March.

The Dow and the S&P 500 are up 61 and 68% respectively from their bear market lows last year.  The NASDAQ comp is an index is up approximately 80% from the bear market lows.  It almost makes you wonder if we have learned anything from that dark time in 2008 when everything went to smithereens?  Is it time to sell?  Let me be the first one to say I dunno.

Much of this is simply mathematical gymnastics.  For instance the depth of the losses last year were so great that when you measure against that almost anything looks good.  For instance the TSX is now at 11,964 and at its bull market height in early 2008 it was at 15,073.  So if you look at it that way, we still have a very long way to go.  Getting to the top of the mountain is always harder than falling down the hill.

Of course trying to put a bad news spin on this doesn’t work either.  In the last quarter of 2009 the Canadian economy grew at a 5% annualized growth.  That is smoking folks.  If you have read this column on a regular basis you will know that we commonly talk about economic growth rates of one and 2% and are happy to have those.  So it looks like the economy at least in Canada is back in spades and the stock markets are a reflection of that.   I just hope we learned our lesson back in the day when we lost it all.

If you were to ask Stephen Harper and Dalton McGuinty if this is good news, I’m sure they would be grabbing for the microphone.  A year ago when they both launched their stimulus package I was in agreement as an economist at pumping money into the economy was the right thing to do.  My belief was that if money was pumped into the economy it could be used to stimulate aggregate demand.  This would jumpstart the economy, cut short the recession and get the private sector up and running again.  So now we see these bigger economic numbers, I think it worked this time.  Interestingly enough much of the stimulus funding is still flowing and will flow until late 2010.  Key for our governments is a sustained economic growth after the stimulus comes to an end.

Of course what these two levels of government have done recently is have a throne speech laying out their blueprint for the future.  In the case of the federal government they have one more year of stimulus funding and then the cuts are going to take place.  In the case of the provincial government they have similar plans but they are launching a new thrust in education and mining.  They are starting a online University and creating 20,000 more postsecondary education spots in Ontario’s colleges and universities.  In addition to that they are developing Northwestern Ontario’s “Ring of Fire “, which is a large area of some of the richest chromite deposits in the world.  It sounds like there has been some innovative planning somewhere along the road.

So what is the road ahead?  Well, as an economist let me assume the world will never change in the next five years.  LOL.  That is exactly the point.  Sometimes being an economist means you have to think big and while trying to hit the economic bull’s-eye, sometimes you just get things close to the right direction.  Are we going that way?  I dunno.  However, in the great scheme of things it looks like a pretty good start.

With Dr. A.K. Enamul Haque Ph.D

In Canada last month we were all focused on the Vancouver Olympics. It’s natural for Canadians to be watching winter sports at this time of year.  However one of my favorite pastimes every two years is watching the opening ceremonies of the winter and Summer Olympics.  I like to watch because I enjoy seeing the people of the world getting together in one place all at the same time.  For whatever reason, I’ve always felt that was a very good thing.

Interestingly enough my focus is always on the athletes from Asia.  With Asia being one of the most dynamic places on earth both with population and increased economic activity, I’m always watching for the countries from Asia to take their place on the medal stand.  Regrettably, other than China, I think the cultural differences in sport don’t lend themselves to Asian athletes.  What other reason could we explain the Indian team showing up in Vancouver and not having any uniforms for the opening ceremonies? I hope that a certain point that cultural chasm between Asia and the Olympic movement gets some attention.

Of course China does not take a back seat to anybody at the Olympic games, having won the most medals at the 2008 Beijing Olympics.  They have a smaller contingent in Vancouver and they do not expect to win the medal count, but it’s pretty obvious in a few years they might be taking their place in the Winter Olympics too.

In many ways, China’s ascendance to large Olympic dreams mirrors the whole Asian region.  We have all had and some of us have experienced the economic explosion “on the other side of the world “.  China’s economic growth rates have continually been in the double digits with only a few hiccups over the last 10 years.  What this means of course is increased wealth per capita, increased trade and at the end of the day increased influence in the world.  When I have traveled into East Asia and Australia, China is like the big brother in the neighborhood.  Everybody is either trying to trade with them or keep them happy in some other way.

I read one study where the Chinese economy will reach $123 trillion in 2040.  By that time the per capita income in China will be higher than many major countries in Western Europe.  The thrust of the study had to do with the differing standards of living.  It was pointed out that Western society was resting on their laurels and Asian society works harder and had a brighter future.

Sitting here in Canada and traveling across the United States, it’s somewhat difficult to truly fathom what all this means.  For instance as many of you know I give presentations across Canada on grain markets.  There are some fundamental economic benchmarks that I’ve always believed in.  Many of them have to do with the perceived wealth of Western society now and in the future.  So when you see the statistics regarding China and the influence that will give them, increasingly in 2010 that is making me pause.  What’s this mean for the world in the next 5 to 10 years and how can we thrive within that?

The short answer is everything should be turning up roses.  For instance doesn’t increased wealth in the world mean everybody’s doing better?  The point being it is not as simple as that as old prejudices combined with scarce economic resources and ethnic tensions always seem to get in the way.  China and much of South Asia surely has its share of that.  So simply stating that China and Asia are going to increasingly be the world’s leading power center does not necessarily ring true.

However, when this simple Canadian rides through the streets of Asia in a place like Bangladesh I cannot see how it can be avoided.   In other words, when I look at Bangladesh’s youth, work ethic and population and extrapolate that across Asia, I can only see good economic things.  I see at a certain point that these Asian nations take a leading role in world economic affairs and at some point in the future maybe my grandchildren or great-grandchildren here in Canada will take direction from there.

At the present time the Western world continues to deal with global economic recession.  Our American friends have particular troubles, as their government spending has been so high there is much conjecture on how they will pay it all back.  Our Chinese friends hold much of that debt in Asia.  I believe we will learn much from how the Chinese and Americans work out this problem in the next few years.  There are a myriad of options, not necessarily friendly to each side.  Nobody likes the specter of disappearing money.

The challenge will be to coexist peacefully as our world changes.  I see it as a fundamental shift of world power.  However, I don’t think everybody sees it that way especially on this side of the world.  So sure, that my friends, maybe a problem.  I just hope it doesn’t get too messy.

Changing world, Asia and its challenges
A.K. Enamul Haque PhD

As the Winter Olympics was lifted in Canada, my wife, my son and I were glued to the TV screen to watch the opening ceremony from Canada.  With full enthusiasm I was showing it to them because it is being held in Canada where I spent about 6 years of my life.  In few minutes time, my son asked me a question to which I did not have a full answer.  The question was “When Bangladesh would be able to participate in Winter Olympic?” I told him, unless we are able to deal with poverty, I don’t think we should even think of participating in it.  It is still a club where rich nations can only afford to play.

I agree with Phil that Asia is changing rapidly.  With China growing, Asian economies are also integrating in terms of trade and investment. In 2003, the Wharton Business School published a book called “the Chinese Century”.  I have been teaching this book in my class on international business.

The book narrates how this century is likely to be the Chinese century.  However, I see the rise of Asia as a result of the consequences of the failures of the economic super powers. What we see today is a sequel of a drama.

Asia was an economic superpower until the nineteenth century.  In 1820, India and China produced more than 50% of the world’s GDP.  These two countries were at the center of attraction for all. At that time, all voyages were coming to Asia. Many European countries floated companies like the East India Company to trade with India only.  However, it has all changed since then.

Asia was colonized by Europe and it gradually lost its economic power.  Europe emerged as the new center of the universe in terms of economic activities. By 1920, Europe reached its peak. The economic growth of Europe also led to migration of people and migration of capital. But by the 1940s Europe lost its power to the USA.  How? Europeans got themselves into trouble when they initiated the wars- one in 1919 and other one in 1939. The war eroded their economic power.

By the end of the WWII, the USA emerged as a new center of economic power.  The free world began to assemble around USA.  Many now believe that its economic power is also coming to an end. Unfortunately this is also due to several wars.  This time, however, the wars are fought far away from its own territory – in the Middle East.

The current prediction is that by 2050, China and India will be the center of all economic activities in the world. However, I still think that this is far from true.  The fundamental challenge of Asian nations is not religious extremism, not freedom of speech, not capitalism, not socialism, not democracy; the challenge is how to deal with its huge scale of poverty.  Unless and until they can successfully deal with poverty Asian economies will not be able to stand on their feet. Unfortunately, except China others including India seemed to be less worried about it.

At the same time I was watching the hearing I was writing an article about the “New Generation” John Deere tractors, which were introduced in 1960, the 1010, 2010, 3010 and 4010.  Simply put these tractors changed American agriculture.  I am writing a five part series this year about those tractors for Heritage Iron magazine out of Illinois.  So when I do that, I often have the privilege of speaking with retired John Deere engineers who are still living in the United States.  At the time of these tractors introduction in 1960, they were mere kids.

So with the Toyota chairman on the television and one of these retired engineers on the end of my phone, his comments were telling.  He was relaying to me some common engineering terms, which tractor engineers have to think about when designing farm tractors.  He veered from the script during my conversation and said something about how he couldn’t believe the engineers at Toyota had failed in the design process with regard to those sticky accelerators.  He told me when they designed these “New Generation” tractors and the tractors after that time when something failed it was meant to quit or go to zero.  This retired engineer who designed some of the most remarkable John Deere tractors ever made was simply stating the obvious.  He could not believe that Toyota engineers had designed something that when it failed, it accelerated, its failure possibly causing catastrophic results.

It got me to thinking. Can’t the same thing happen on today’s modern farm equipment?  With the specialized computer circuitry and micro processors embedded within every facet of 2010 farm machinery, does it present the specter of a Toyota type meltdown?  The simple answer is I dunno.  However the greater answer with regard to our farm machinery questions and ultimately the efficiency in our farm fields is much wider in scope.  In the realm of present-day events, does Toyota’s reliance on a computerized control for their sticky accelerator resemble anything you may have had experience with on present-day farm equipment?

It is an interesting question and one that I can answer with a resounding yes!  However, it is always easy to yell fire in a crowded theater especially when that tractor is not working or that combine has a problem.  Keep in mind that my retired John Deere engineer friend told me last week.  He told me that at the time when John Deere was developing the early front-wheel-drive (assist) prototypes they had some big problems with farmer perceptions.  Simply put when farmers drove the tractor’s there was a certain hearing, seeing and feeling to it.  The new front wheel drive tractors at the time pulled more efficiently and didn’t spin going around the corner.  He told me that farmers complained because the wheels didn’t spin at the time.  Of course they didn’t spin because they were working more efficiently but at the end of the day that didn’t matter because farmers perception were it was not as good because the front wheels were spinning.  Translate that into 2010 where we have automatic steering and guidance and you can see that perceptions are changing.  My question is within this long horizon of change in our tractors and combines has the embedded technology within them overshot some safety issues?

As most of you know I also write all the farm machinery reviews for Country Guide magazine here in Canada.  I just finished reviewing new auto steer products and I’ve written another piece regarding the total impact of that on modern agriculture.  I was quite taken aback when I was told the temptation to get off a moving tractor or combine is much greater now because of guidance and auto steer.  I must admit I have done it too.  Since I was young there have been times when I slipped off the moving tractor in first gear to look back at a problem with the drill or some other type of implement.  Now with auto steering guidance, getting off a moving farm vehicle is so much easier.  No amounts of beeper warnings can cover up human nature.

When I first mentioned these types of issues several years ago in this column I got a note from a farmer in Minnesota who told me his brand-new tractor stopped cold at the busy intersection near his farm.  The onboard computer had shut down and the only way to move that thing was to pull it to the side of the road with a chain attached to another tractor.  We all have other examples of the same thing, which boil down to computerized technology overriding a human’s ability to over ride it.  When Rhonda Smith, a Lexus owner from Tennessee had both feet on the break pad trying to stop her Toyota while it wildly accelerated, it boils down to the same thing.

That is not a condemnation of modern farm machinery.  It is only an admission that the advancement of computerized technology within our equipment needs to be balanced with the hearing feeling and seeing dynamic which my retired engineer from John Deere told me about the other day. With Toyota currently in freefall, I’m trusting there are no farm equipment similarities.  We have to get real with these things, technology is great, but human nature at the end of the day, will always rule.

When Sidney Crosby’s goal went down I fully expected to see people out on the street in Dresden.  When I looked out I saw nothing, the reason being everybody was still beside their television set grasping the depth of the moment.  As I have many American friends and editors I couldn’t help but announce to them how I felt.  When I got into the twitter sphere they were all kinds of tweets about how good everybody felt.  I wanted to congratulate my American friends on how good their team was.  They wanted to congratulate me on how good my team was.  The funny part is none of us are athletes and none of us had anything to do with it other than what’s in our soul.

I am old enough to remember the disappointment as a teenager of Canada not winning gold at Montreal in 1976.  I was so disappointed that Greg Joy did not win the gold medal on the last day of the Olympics, taking silver instead.  However, I had no illusions.  I did not expect Canada to take many medals because we were not very good at any of those Olympic sports compared to the Soviet bloc.  Ditto for 1988 in Calgary.  So when you put it in that context it makes the 14 gold medals, a world record, and a real stunner.  I could not have even imagined that in 1976.

Interestingly enough I felt that the Vancouver Olympics as well as the gold-medal game was going to have a very positive economic effect on the Canadian economy.  It does seem to me that “consumer confidence” was boiling over during the Olympic games.  When you feel good, you generally go out and spend money versus when you don’t.  So I felt as the games went by, Canadians were spending money and the gold medal game would send many of us over the top.  That’s to say nothing about the economic impact on Vancouver where international visitors spent $5.2 million on opening day.  Cha-ching.

On top of all this we got some very good economic news Monday.  Statistics Canada announced that the Canadian economy GDP grew by over 5% in the fourth quarter of 2009.  That is incredible ladies and gentlemen.  If we get that kind of growth in 2010 I see a huge boost to not only job numbers but also wealth.  This is happening despite our American friends still mired in negative economic territory.  So when you had the Vancouver Olympics plus the gold medal game to this I think we’ll see similar growth rates for the first quarter of 2010.

Having said that, is this the time to be writing a column about Canadian economics?  I don’t think so.  This country almost exploded on Sunday night.  In fact when my Twitter page lit up with comments from my American editors I told them that.  There is something about hockey, which bonds Canadians despite how casual a fan you might be.

Take your loyal scribe for instance.  People that know me know that I am an avid Detroit Piston fan.  I never miss a game, I either watch it, PVR it or check the score the next day.  That stems from the historical fact that I grew up in Southwest Ontario where the NBA has always had a following with our proximity to Detroit.  Nonetheless, I have always been a hockey fan but as I’ve grown older I’ve turned into much more casual a fan.  I am that way because I don’t find NHL hockey as exciting as I once did.  When the Stanley Cup playoffs are on I enjoy it much more than during the regular season.  Needless to say, when we formed team Canada and go into international competition something changes.  I’m just like any other Canadian out there, an avid hockey fan, bonded to everybody else wanting Canada to claim our game.

I am not particularly comfortable with that.  I never get too tied up with emotional strings and essentially that is what that is.  Needless to say, it was a great victory for Canada.  Yes, it made me proud to be a Canadian.  It was all such fun.

At the same time south of our border the US Federal Reserve announced that it would raise its discount rate from 0.5% to 0.75%, effectively starting the path toward higher interest rates.  Last week at the Louisville Farm show, all the top American agricultural economists were saying there was only one way to go for interest rates and that was up.  You couldn’t remain on 0% forever.  So today we start on that path toward double-digit interest rates for North American agriculture.

Those two developments over the last day or so in my mind will have deep long-term effects on North American agriculture.  The interest rate effect I’ve been waiting for a long time.  With credit being the lubrication of our economy, sending interest rates down in response to recessionary times was the tonic to get the economy moving again.  In the case of agriculture, the farm economy did not hit the same type of recessionary wall and cheap interest rates were a super stimulus to production agriculture.  Case in point was John Deere announcing today that their first-quarter profit topped analyst estimates.   They also announced that their 2010 forecast for agricultural equipment sales in the United States and Canada has been adjusted up.

At the same time this week we had federal finance Minister Jim Flaherty tighten up mortgage rules for Canadians.  He reduced the number of years that Canadians could get a mortgage amortized and he also increased the down payment that Canadians would require when getting mortgage insurance.  The impetus behind these policy decisions was to restrict Canadians from getting over their heads into debt when the interest rate tsunami eventually comes.  It’s an interesting analogy, but there are no such restrictions on farmers buying farm equipment, land and in the Canadian case, quota.

The point being “times are changing “in the structural agricultural economic background that underpins our farms and our rural society.  For instance there is a generation farming now who have faced constantly decreasing interest rates.  Your loyal scribe is one of them having started my farming career a demand loan for 23.25%.  I paid for a lot of my land at 12 and 13%.  However, when interest rates hit a 50 year low last year I was at rock bottom.  I’m the poster child for a guy who has seen ever decreasing interest rates.  Others younger than me don’t even know what double-digit interest rates are.  The events of the last few days surrounding the Federal Reserve move, marks the beginning of us getting back there.

That Québec situation is a Canadian phenomenon.  Last week I got a call from a Manitoba farmer who had received an e-mail authored by myself but forwarded to him through a third-party.  This e-mail had to do with my opinion about Agristabilty, which just happened to be the topic of last week’s column.  This Manitoba farmer in some of his colleagues were the proponents of something called Agristabilty Plus which is similar to our present day Agristabilty but it takes into account the cost of production and quite a few other things.  Needless to say on reading the proposal I wrote another commentary about Agristabilty Plus, which was somewhat critical.  However, the main reason for my criticism was that this policy would never work in Ontario and certainly not in Québec.

It was completely obvious to me that my Manitoba friend was quite shocked with my opinion, especially my views from Ontario and Québec.  One thing Canadian farmers outside of Quebec need to understand is that to be a Québec farmer is something you don’t do.  Being a Québec farmer is something you feel and the nationalism they feel for the Québec nation is just as real as you might feel for Canada.  So trying to suggest that Agristabilty Plus would work nationally and in Québec in my mind was a nonstarter.  Seeing Lucien Bouchard standup today and say the Québec separatist dream is dead, I know resonated in every Québec farmstead.  How that will affect the greater Canadian agricultural policy, I dunno.  Needless to say, I know at the end of the day it probably won’t make it easier.

So as we look ahead, there will be many challenges especially when we consider our present bearish market structure.  But keep in mind that the week of February 14, 2010 may be looked back on as a watershed time for our Canadian agricultural economy.  Somebody will say, that’s the week interest rates started their long journey up and Québec farm country lost a little bit of its soul.  How this plays out will surely challenge us in the future.

Through the years I like to think that I’ve seen almost everything.  For instance, I often tell audiences where I’m invited to speak that the first loan I ever got from a bank was at 23.25%.  That was way back in 1981 when interest rates skyrocketed and remained there for several months.  The effect those high rates had was a beating down on inflation and economic activity.  As odd as that might sound now in our recessionary times of 2010, that was the order of the day in 1981.

Since that time we have been on an ever-declining path for Canadian interest rates.  For most of us who have been here over the past 30 years it’s been constantly easier to borrow money.  In fact at the present time we have the cheapest interest rates in Canadian history.  It’s completely obvious interest rates are going up for the simple fact that they cannot go down anymore.  If they did we would be giving money away for free and that doesn’t make any sense.  Of course the question is when and by how much and are double-digit interest rates coming.

We got our answer last week and it was fairly telling.  The US Federal Reserve raised interest rates from .25% to .75%.  Effectively we are still close to zero, but that was enough to send the US dollar up.  Our American friends have been struggling to find the balance between lowering interest rates to boost aggregate demand and employment.  That is one reason that interest rates are so low.  Of course they have borrowed billions of dollars on that side of the border to support their economy raising the federal debt to huge levels.  This has effectively produced a “debt bomb,” which our American friends will need to finance.  Having the Federal Reserve raise interest rates makes it easier to attract foreign capital to finance much of that debt.  The question is does the Federal Reserve move last week give us any clues to future economic reality?

To me that is a very difficult question to answer based on my experience.  For instance everything in my economic bones tells me that with the US government borrowing so much capital, they will eventually pay it back by monetizing the debt.  In other words the US money supply will increase and we will have high inflation.  Eventually this will be countered with higher interest rates.  It’s all a balance.  The difficult part for me is truly deciding whether our economic reality is like that.  In other words based on the times where we are in now, will the US government monetize the debt?  Will there be the classic inflation, interest rate scenario play out that we have become very used to?  Or do the economic problems we have now featuring such unique variables that all bets are off going forward?  Of course we need to add the question, is there a danger of falling back into recession, even after the huge government stimulus?

The simple answer for me to these questions is “I dunno”.  The reason that I am questioning some of the economic benchmarks that I have learned over a period of years have to do with the Chinese holding all that US debt.  It also has to do with the growth in Asian economies versus the stagnant growth in the US economy and negative growth in Europe.  I simply don’t know how and when the current debt levels of government will be dealt with.

Having said that, there was a bit of a clue last week with the interest rate increase.  If I were to bet, I’d say we’d be back to over 10% interest rates by late 2012.  If that is to happen I am sure that we will look back at this past week when the Federal Reserve made its move. More clues will surely be in the works.  However, remember, its fluid, this time around, I don’t think there will be steady hand on the tiller.

For those of you too busy to take notice of our federal agriculture Minister Gerry Ritz met with his provincial counterparts last week in Toronto.  At the end of the day, nothing happened.  Of course there has been a wide chorus of calls for a revamping of Agristability and there was some hope that the Minister would say something positive after that meeting.  What federal agriculture Minister Gerry Ritz said was the ministers would need to wait until their respective treasury boards let them know how much money they could spend.

Of course if you have spent any time in the agricultural safety net trenches in Ontario you will know these meetings discussing safety nets have become almost comical.  For my American readers, Agristability is a agricultural safety net program modeled after the previous program, which was called CAIS.  These programs attempt to stabilize gross margins based on a complicated formula, which has proven to be a complete failure.   These programs resulted in widespread protest across Québec and Ontario in 2006.  Farmers were told at the time the change was coming.

Little did we know at the time that change would be the ethanol gold rush.  What government could not do in stabilizing farm revenues, the ethanol gods did.  With Canada’s agricultural safety net equation including a provincial component the chances of getting something worth anything were low at the time.  In Ontario farmers got there risk management plan or RMP and were hoping to combine with a federal program to stabilize farm income.  Four years after the big protests in Québec and Ontario, we’re still not there.  Ontario farmers still don’t have a safety net, which works.  However, because market conditions have been buoyant since then, if there had been an effective safety net in place over the last four years, it wouldn’t have cost the government a dime.

The optics going forward are obviously very bad especially when you look at market conditions.  One major difference between American analysts and Canadian analysts like myself has to do with safety net programs.  For instance at the present time the market is turning fundamentally bearish.  Into this void we hear of many American analysts talking about how crop insurance and other subsidy programs are going to help their producers.  It’s all a trade-off between price and the US Farm Bill.  In Canada on the other hand it’s all about lower prices and we do not have an agricultural safety net that works.

So as we head into what some grain analysts are calling very bearish market conditions Canadian producers are at risk for very hard times.  It must be remembered though that up-and-down price movement, hills and valleys and low returns are what we sign on to when we are involved in the farming business.  So that is not a surprise.  Risk is that constant on the farm and managing it is our challenge.  In Canada, helping farmers manage that risk with effective agricultural safety net programs has always been the goal of both our commodity organizations and general farm organizations.

Of course the road ahead on this in Canada is about as clear as mud.  Keep in mind some of my American analyst friends are talking about soybeans starting with a $6 or $7 and corn sub $2.90. It’s scary isn’t it?  Regardless of the that and regardless of any grain contracts you may have had at a better price, keep in mind the important thing is to have a policy, which supports Canadian producers in times of great price volatility.  It’s not rocket science.  However, as former Conservative agriculture Minister Chuck Strahl said in 2006, it helps when farmers are protesting in the streets and get on the front page of the Toronto Star.

I have never forgotten that. Would our current agriculture Minister Gerry Ritz feel the same way if farmers launched protests and get their picture on the front page of the Toronto Star?  I dunno.   What he said was the ministers were going to wait until July and try again.  Something tells me over a period of four years we’ve lost something in the translation.   It’s now all about surprise, surprise, more stall study stall.   Maybe we should be getting those hay wagons ready.