You may wonder why I am writing about agriculture so much these days, since this blog resides on a corporate site devoted to construction. Believe me, there is a solid connection.

Construction activity turns on interest rates. Interest rates are set based on the inflation rate. The next big push to the general price level is most likely to come from food prices. I know that in our household, the weekly shopping bill has gone up by about one-quarter over the past two years, regardless of what official Consumer Price Index (CPI) numbers might say. We’re shopping for bargains now, like never before.

There are three major tiers of agricultural products: (1) cereals and grains; (2) fruits and vegetables; and (3) livestock. The U.S. and Canada are fortunate to be self-reliant in all three product areas, but we are being affected by developments in other countries.

Difficult weather-related growing conditions, an expanding middle class in China and India, higher fertilizer prices and a shift to biofuels have all caused cereal and grain prices to lift into orbit. You name the crop – wheat, rice, barley, soybeans, corn – and it has gone up dramatically in price over the past year. (Potatoes are one of the rare exceptions.)

Conversely, higher prices for crops − which are fed to cattle, hogs and poultry, as well as being consumed by humans − initially drive down the price of livestock. Faced with rising feedstock costs, farmers divest portions of their herds. The increase in supply that ends up on mercantile exchanges lowers prices at first, until availability and demand move back into better equilibrium.

Fruits and vegetables are where the U.S. and Canada can diverge the most. The exchange rate factors in because Canada imports a lot of its produce from the United States. Canada’s food price sub-index (+0.4% year over year) of the CPI is currently restrained thanks to the 15% year-over-year increase in value of the loonie versus the greenback.

There is one other aspect of agricultural prices to consider, fertilizers. As in so many other areas of the economy, energy prices are playing a key role here as well. Fertilizer prices have shot up because of demand from farmers around the world. Potash, which comes from potassium mines, is a prime example. However, some other fertilizers (e.g., ammonia and urea) are oil and gas based. As such, their prices have increased not only due to greater demand, but also as a consequence of high world oil prices.

Enjoy the low interest rates that are currently in place. They are likely to prevail at least through the summer. However, the clock may well be ticking on how long they can last. The source of a future disturbance to the current tranquility is likely to be higher prices originating in the agricultural sector.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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