Kohl's notes
Ag economist Dr. David Kohl outlines two ripple effects to watch this year.
At a recent meeting in Swift Current, Dr. David Kohl made a presentation to RBC Royal Bank farm clients from southwestern Saskatchewan. Before and after the presentation, many producers had the same question for the Virginia Tech agricultural economist: what’s up with energy prices?
“The whole oil/energy question is top of mind with producers across North America,” says Kohl. “Everyone wants to know whether these prices are a shortterm blip, or something that’s going to be with us for a while.”
By Kohl’s analysis, oil and natural gas prices have an impact on as much as 80 per cent of farm operating expenses. Everything from fertilizer to crop chemicals to fuel and lubrication costs are influenced by the direction of global prices for these resources. North America got a small taste of a 21st century energy crisis last September, when Hurricane Katrina severely damaged U.S. petroleum refining capacity.
Kohl’s advice to producers: get used to it, and plan accordingly. “My feeling is that for the next one to five years, we’ll be in an up-and-down pattern on energy prices, with perhaps a weighting toward up,” he says. “Going into their planning cycles, farmers will need to be mindful of this, because it really ripples through the balance sheet.”
Impact of U.S. Farm Bill felt here
The 2002 U.S. Farm Bill, approved by Congress in 2001, dramatically increased program spending compared to the previous Farm Bill. As U.S. legislators sit down throughout 2006 to hammer out a 2007 Farm Bill, they face issues that simply weren’t present in 2001. The cost of post-9/11 security measures, operations in Iraq and Afghanistan, plus a trio of damaging hurricanes have helped push the estimated U.S. federal government budget deficit north of $400 billion for 2005. Something’s got to give, and in Kohl’s view, agriculture is a likely candidate.
“This time around, it’s not business as usual,” says Kohl. “With deficits so high, and the need to show concessions to World Trade Organization talks, farm program payments are definitely on the chopping block. There could be program cuts of 40 to 50 per cent.”
Cuts to U.S. program payments could have the effect of providing Canadian producers more access to a level playing field. That’s because Farm Bill provisions can significantly influence prices and future crop selections by U.S. producers. Less support for U.S. soybeans, for example, could help Canadian canola producers.
Kohl urges Canadian producers to monitor U.S. and global developments regularly, since events in one place have a way of being felt far away.
“Look at the impact of Hurricane Katrina in New Orleans,” he says. “It had an immediate impact on gasoline prices in Canada, and on insurance rates as far away as Europe. When something happens in this interconnected world, watch for the ripples.”
|
