FCC economists identify five key trends to watch in 2022

Like fortune tellers with crystal balls, Farm Credit Canada’s (FCC) economics team has been studying their “crystal” charts to forecast what’s in store for Canada’s agriculture and food industry in 2022.

“Sometimes the best indicators of what will happen in the future can be found in the recent past,” said J.P. Gervais, FCC’s chief economist. “But with a slower-than-expected recovery from the pandemic and multiple challenges that have rocked industry supply chains in 2021, this year’s forecast for Canada’s agriculture and food industry has been a real challenge.”

Despite the uncertainty, Gervais suggests industry producers and processors keep an eye on five key trends: Canada’s inflation and interest rates, ongoing supply chain challenges, labour shortages, supply-demand imbalances and strength in meat demand. Understanding these trends will help business owners and operators mitigate risks and take advantage of opportunities throughout 2022 and beyond.

Inflation and interest rates

Inflation is expected to be above the Bank of Canada’s target rate for most of 2022, which also should drive interest rate increases in an effort by the central bank to keep a lid on inflation.

“Persistent supply chain disruptions and global demand will continue to prompt higher prices on virtually everything – two trends that began well before 2021,” Gervais said. “Supply shortages may continue for some key commodities, and overall price increases on oil, gas and global agriculture commodity supplies are not expected to weaken before mid-year.”

Supply chain and labour force challenges

Throughout the pandemic, supply chain disruptions caused by shortages and backlogs in global transport networks created inflationary pressures. Average month-over-month global transportation costs for dry goods increased 7.3 per cent in 2020 and more than doubled in 2021 with an average increase of 15.3 per cent.

“Looking ahead in 2022, we see strong demand for raw agriculture commodities and other manufacturing inputs. Coupled with shipping container and transportation labour shortages, we’re forecasting a continuing trend toward higher transportation costs,” Gervais said. “It’s highly predictable the higher cost will be passed onto consumers and reflected in the price we pay for food and beverages in the grocery store.”

At the same time, chronic labour force shortages in the food processing sector – made worse by the pandemic – could also contribute to higher food costs.

Supply and demand for key commodities

Drought and other extreme weather events, plus surging demand since 2019 have each contributed to recent global supply/demand imbalances for several major crops. Not even the price spikes produced by record demand curbed the trade of raw commodities around the world throughout 2020 and 2021.

“This has been good news for many Canadian producers who have seen reduced yields, since global demand for commodities has been generating overall stronger prices,” Gervais said. “But since global stocks aren’t that tight for some commodities – such as wheat and soybean – strong demand will be needed over the longer term to sustain these prices.”

Shifting consumer demand for meat

Meat consumption patterns are normally driven by consumer income and prices, but lockdowns and food service closures during the pandemic have added a new challenge for the sector.

The pandemic has had a clear impact on both meat consumption (consumer purchases) and demand (consumer preferences). While consumer demand for chicken rebounded in 2021 in response to widespread food service re-openings and perhaps higher red meat prices, consumer purchases of red meat have waned.

“Meat consumption has shifted and declined as households have cut back on more expensive meals, due to job and income losses,” Gervais said. “We’ll be watching closely to see if the demand for meat returns to its pre-pandemic growth. But business conditions in the food service sector will be major influences in 2022.”

Stronger, more resilient and driven by innovation

Gervais believes market conditions will eventually improve, and he’s optimistic that Canada’s agriculture and food industry will emerge stronger and more resilient to rapidly changing economic conditions and unexpected global situations. Innovation has also been a hallmark of the food supply chain, as it continues to adjust to the realities of the pandemic.

“While there are many challenges on the road ahead, there are also many opportunities for Canadian agriculture and food producers, processors, suppliers and service providers,” Gervais said. “One key is to have sound risk management strategies to ensure your business can thrive despite some economic headwinds and take advantage of those opportunities as they arise.”