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Economics
Avery Shenfeld(416) 594-7356
Benjamin Tal(416) 956-3698
Peter Buchanan(416) 594-7354
Meny Grauman(416) 956-6527
Krishen Rangasamy(416) 956-3219
The US isn’t quite Zimbabwe, but its monetary policy, like that of the UK, and perhaps one day that of Canada, is providing a taste of what is normally confined to the developing world. Printing money—quantitative easing to those who like formality—looks to be a key ingredient in preventing a global recession from tipping into a lasting depression. But as we are already seeing, putting it into practice requires a delicate hand from central bankers.
It’s easy to understand where Chairman Bernanke is going, because he laid it all out in black and white, back in November. November 2002, that is, in a speech to the National Economics Club when he was only a member of the Fed’s Board of Governors.
Musing about what the central bank could do if, hypothetically, it faced a deflation threat and had already cut rates to zero, he pointed to a powerful solution: start the presses. Bernanke rightly noted that deflation could always be prevented if that weapon was deployed with sufficient fervour. Have the Treasury ramp up spending (or cut taxes), and the Fed buy up the additional bonds with newly created money, and all of that spending would spur growth. And all of those extra dollars in the economy would eventually shrink the buying power of each dollar, the very definition of inflation.
But as we are seeing, there are hazards strewn along that path to success. If the market catches wind of what’s up, it can start bidding up Treasury yields in anticipation of runaway inflation in the next cycle. Both the
Bank of England and the Fed initially lowered bond yields when they announced their buying intentions, but yields crept up again as talk turned to inflation down the road. The central bank could, of course, simply buy even more bonds to drive yields down again, but getting into that sort of tit-for-tat with the bond market could, in the extreme, bring hyperinflation down the road.
Excessive inflation is indeed a hazard after a winning battle against deflation. In the US, facing a sharp climb in government debt and a household sector similarly over-borrowed, inflation could be a tempting way to shrink the real value of those burdens. And even without a deliberate plan, it would be easy to err and unintentionally overdo the money pump-priming, or reverse it too late. Even Bernanke admitted that because quantitative easing policies are “relatively less familiar, they may raise practical problems of implementation and calibration of their likely economic effects”.
In Canada, quantitative easing still lies ahead, but facing a horrific recession, we expect the Bank of Canada to tap a gentler version of that weapon before mid-year (see pages 4-7). The BoC is much more committed to its strict inflation target. And Canada’s government debt burden, while again on the rise, will still be much lower than Washington’s, creating less of a temptation to simply inflate it away. Even so, Governor Carney will have his work cut out for him as he attempts to keep yields and long-term inflation expectations in check, with money supply growth already on steroids.
“ E x c e s s i v e i n f l a t i o n i s indeed a hazard after a winning batt le against deflation.“
Start the Pressesby Avery Shenfeld
March 2, 2009
April 6, 2009
CIBC World Markets InC. StrategEcon - April 6, 2009
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MARKET CALL
INTEREST & FOREIGN EXCHANGE RATES
The Bank of Canada may not announce a change in its overnight target, since that would raise technical issues in the money market without helping the economy materially. Carney is making it clear that rates will stay there until the economy is growing above potential and slack is being absorbed. Two-year yields should, therefore, stay well grounded, and we’ve trimmed our forecast for the front end of the yield curve.
At the long end, it’s a battle between the bullish impacts of central bank buying, against the potentially bearish fears of money supply expansion generating a higher long term inflation rate in the next expansion. Adding to that are the pressures from increased supply. We see the Canadian and US curves steepening due to these last two impacts, but less so in Canada, where inflation targeting is more ingrained, debt/GDP levels are climbing more slowly and quantitative easing will be less dramatic.
Reduced fears of outright depression allowed for a calming in risk aversion, and favoured a flight out of US dollars. But weak economic news in the coming quarter could see the big dollar temporarily regain ground, at the expense of the C$. More definitive signs of an economic recovery, even a tepid one, should see US dollar selling resume later this year, to the benefit of the C$.
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2009 2010
END OF PERIOD: 3-Apr Jun Sep Dec Mar
CDA Overnight target rate 0.50 0.50 0.50 0.50 0.5098-Day Treasury Bills 0.40 0.30 0.30 0.35 0.402-Year Gov't Bond (1.25% 06/11) 1.14 1.05 1.10 1.15 1.2510-Year Gov't Bond (3.75% 06/19) 2.93 2.85 2.90 3.00 3.2530-Year Gov't Bond (5% 06/37) 3.66 3.60 3.70 3.80 4.10
U.S. Federal Funds Rate 0.25 0.25 0.25 0.25 0.2591-Day Treasury Bills 0.21 0.20 0.30 0.30 0.302-Year Gov't Note (0.88% 03/11) 0.95 0.90 0.90 0.95 1.2510-Year Gov't Note (2.75% 02/19) 2.90 2.80 3.15 3.25 3.4530-Year Gov't Bond (3.5% 02/39) 3.70 3.70 3.80 3.90 4.25
Canada - US T-Bill Spread 0.19 0.10 0.00 0.05 0.10Canada - US 10-Year Bond Spread 0.03 0.05 -0.25 -0.25 -0.20
Canada Yield Curve (30-Year — 2-Year) 2.52 2.55 2.60 2.65 2.85US Yield Curve (30-Year — 2-Year) 2.75 2.80 2.90 2.95 3.00
EXCHANGE RATES — (US¢/C$) 81.2 76.9 80.0 84.7 86.2— (C$/US$) 1.231 1.300 1.250 1.180 1.160— (Yen/US$) 100 105 100 97 95— (US$/euro) 1.35 1.30 1.26 1.28 1.35— (US$/pound) 1.48 1.44 1.44 1.48 1.57— (US¢/A$) 71.7 65.0 68.0 72.0 75.0
CIBC World Markets InC. StrategEcon - April 6, 2009
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STRATEGY AND EARNINGS OUTLOOK
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Equity markets roared back in late March. Arguing for a sub-benchmark equity weighting, softness in the upcoming US and Canadian economic data and Q1 earnings could make it difficult for markets to hang onto all of their recent impressive, but overdone, gains. We still see the TSX having room to run to 11,000 by the end of next year. But getting there will require a true turn in the economy and more progress in addressing US banking and other woes than seen so far.
Red hot tech issues powered the TSX’s mid-1990s rally, with oil leading the next charge, a half-decade later. The lack of a comparable clear cut leader this time and lingering economic weakness could slow the pace of any gains from here, reducing the payoff from an early, heavy move back into stocks. Year-over-year earnings growth for both the TSX and S&P 500 is likely to remain deeply negative until Q4.
Gold and energy, two of our overweights, benefited from the Fed’s decision to expand its quantitative easing program by acquiring Treasury notes in March. A gradual shift in market fears away from deflation, towards inflation tied to rising monetization concerns, should see gold move back comfortably above $1,000 in the next year. We remain underweight consumer discretionary stocks, with the better-than-expected recent retail sales data masking still bleak household fundamentals.
Source: Thomson First Call, CIBC WM
ASSET MIX (%)Benchmark
Strategy Rec-ommendation
Stocks 50 48Bonds 39 34Cash 11 18GICS SECTOR EQUITIES (%)Consumer Discretionary 4.4 1.4Consumer Staples 3.2 6.2Energy 27.7 31.7Financials 27.8 26.8 -Banks 17.7 17.2 -Insur., REITs, other 10.1 9.6Healthcare 0.5 0.5Industrials 5.6 2.1Info Tech 3.7 2.7Materials 20.0 22.0 -Gold 12.9 15.9 -Other Metals 2.5 1.5 -Chemicals 4.2 4.2Telecom 5.6 4.1Utilities 1.7 2.7Note: Bold indicates recommended overweight.
2006 2007 2008 2009 Latest
Energy 11.4 12.3 42.3 -49.6 14.3
Industrials 22.4 11.1 22.8 -19.0 10.3
Materials 78.5 36.9 30.4 -28.7 15.9
Financials 18.6 11.0 -19.7 -3.1 9.1
Utilities 18.1 28.4 -60.9 125.7 13.8
Consumer Staples -0.1 -3.0 8.5 -6.0 13.6
Consumer Discretionary 8.2 27.4 4.8 -17.8 11.8
Info Tech 2.9 69.6 70.8 -7.8 12.3
Health Care 26.7 -37.3 -20.7 5.2 14.4
Telecom Services 25.9 33.4 -6.6 -9.8 11.3
TSX Composite 13.2 11.4 9.3 -25.0 12.0
22.0
29.8
16.1
17.4
17.8
15.7
44.5
12.0
14.9
28.9
12.0
Last 10 yrs.
TSX - Earnings Outlook & Forward PE
PE4-qtr Fw dOperating Earnings
(% ch)
Source: ThomsonReuters
TSX Composite Forward PE
0
10
20
30
87 90 93 97 00 03 07
Average, 1987-date = 14.4
latest = 13.4 827904
678760
0
200
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CIBCWM FcstTSX Index-Adj. Oper. Earnings
12%
11%
-25%9%
CIBC World Markets InC. StrategEcon - April 6, 2009
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The UK and the US have done it, and Canada is now thinking about it. Having cut their target rates effectively to zero, the two leading English speaking central banks are now printing money to buy bonds, in what is termed quantitative easing. In Canada, the central bank’s position is, to twist an historical phrase, quantitative easing if necessary, but not necessarily quantitative easing.
Governor Carney’s team will unveil the framework for a quantitative easing (QE) or credit easing (CE) program in its April Monetary Policy Report. As applied elsewhere, the former entails unsterilized buying of government bonds, the latter unsterilized buying of spread product, in each case pumping up the monetary base and thus the money supply. But a made-in-Canada approach would be of a more restrained nature.
Governor Carney has tried to downplay expectations that the Bank will actually put quantitative easing into effect in April. Nevertheless, considering the deteriorating economic outlook (Chart 1), and with core inflation set to drop below the 1-3% band by late this year, further monetary stimulus will be required. Simply moving the target rate to a quarter-point would have little benefit, and if passed on in lending rates, would squeeze bank margins, since many deposits do not have room to fall by another quarter point. As a result, rather than deliver an overnight target cut in isolation, we expect Carney to
Quantitative Easing, Canadian StyleAvery Shenfeld and Meny Grauman
Chart 1Steeper Canadian Recession Cries Out for Help
Chart 2Canadian Money Supply is Already in High Gear
stand pat in April, and adopt a Canadian-styled variant of QE or CE within the subsequent 3-6 months.
Even absent a monetization program, Canada’s money supply has already grown significantly as the Bank of Canada lowered the overnight rate (Chart 2). After all, cutting the overnight rate entails boosting the monetary base so the market clears at the new, lower, target. Unfortunately, monetary velocity, or rather the number of times each dollar in the economy is spent annually on goods and services, has fallen. Although Canadian short rates are very stimulative, longer-dated yields, particularly for corporate bonds rated below AA, remain above historical levels (Chart 3), a problem that could be addressed through QE and/or CE.
What’s On Carney’s Shopping List?
Carney’s recent remarks suggest that when the Bank of Canada does step into quantitative or credit easing, it won’t be a mirror of US practice. The Fed’s asset choices have reflected America’s more severe private sector credit and mortgage crunch, and the desire to bypass a clogged banking system. Of the US$1.75 tn in long-term asset purchases announced by the Fed to date, only US$300 bn, or 17%, has been dedicated to Treasuries. The bulk
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early 1980's early 1990's current recession
CIBC World Markets InC. StrategEcon - April 6, 2009
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import in Canada where mortgages are typically at 5 years or under.
A Less Dramatic Buying Plan
The nature of Bank of Canada intervention could also be quite different. Assuming that the Bank seeks to retain its unique Large Value Transfer System (LVTS) approach to the overnight market, it couldn’t go out and buy unlimited securities willy-nilly and simply print extra money to do it, as the Fed is doing.
Canada’s overnight system, which differs from the US approach, is designed so that the quantity of funds in the system balances the supply and demand for collateralized overnight funds at the target rate. Printing of money through unsterilized buying of government or other securities would leave an excess of cash in the system, which would then drive the overnight rate below the target (by 25 bps, to the penalty rate that the Bank pays on excesses). Indeed, if the target were dropped to only 25 bps, the actual overnight rate would drop to zero and the overnight market would shut down.
Rather than tinker with a system with which the Bank takes pride, it might instead initially seek to influence the yield curve while leaving the overnight rate intact, perhaps at the current 0.5% rate. It could buy more 5-year Canadas for example, and use reverse-repos or cash management bill issuance to drain the extra funds out of the overnight market. This would not be a true “quantitative easing” in that it would leave the quantity of money unaffected, but like QE, would be aimed at
of the money, or US$1.45 tn, is going to buy mortgage-backed securities and Fannie Mae or Freddie Mac debt. In contrast, the BoE has announced that it will focus its £75 bn in asset purchases on Gilts, with only a small amount going to corporate securities.
If it adopts CE, the Bank of Canada may choose to buy some highly liquid corporates, particularly shorter term paper. Staying at the shorter end allows the notes to roll off the books within the timetable in which the Bank might want to reverse course and abandon these products. Or it could opt to address some of the gaps in funding for lending that historically flowed into securitizations, such as credit cards, car loans and leases. Carney may want to avoid wading into the provincial bond market due the political sensitivities associated with allocations across provincial names. Liquidity concerns could also keep the Bank from jumping into RRBs, in line with the BoE’s decision to eschew purchases of inflation-linked bonds, although the Fed hasn’t ruled out buying US TIPS.
To the extent that the objective is to flatten the government curve by lengthening the duration of the Bank’s holdings, we would expect the Bank of Canada to focus on the 3-7 year part of the curve. Two-years are being held reasonably in check by the Bank’s plausible pledge to keep overnight rates at 0.5% or less for an extended period. Aiming at the 10-30 segment of the curve would have less economic impact than a more targeted effort at mid-Canada rates. Unlike in the US where lower 30-year yields stimulate mortgage refinancing (Chart 4), long bonds have less economic
Chart �High Spreads Keep Corporate Rates Up
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Spread between 10-Yr corporate bonds (BBB) and 10-Yr Canadas, bps
Chart �Fed Mortgage Buying Spurred US Refinancing
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CIBC World Markets InC. StrategEcon - April 6, 2009
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holding down yields beyond the overnight rate. Similarly, it could buy non-government credits to narrow spreads, while neutralizing the impact on overnight funds and not boosting money growth.
Such a lighter approach could be justified on reasons other than avoiding a radical change in the LVTS. A weaker Canadian dollar is already providing some protection against deflation, and bank term funding pressures have been partially addressed through Ottawa’s plan to buy up to $125 bn in insured mortgages. But most notably, the more wounded US banking system implies that a huge Fed buying program isn’t generating the same degree of money supply growth that a proportionate action in Canada would deliver.
Altogether the Fed’s actions in supporting credit markets have boosted the US monetary base by 89% since last year, with trillions more ahead in the coming months. Historically, such a dramatic increase in central bank assets would translate into an explosion in money growth with attendant risks of hyperinflation. But bank deleveraging and risk aversion has sent both the M1 and M2 money multipliers—the ratio of these money measures to the monetary base—significantly lower, for now (Chart 5). Essentially much of the run-up in the US monetary base over the last year is locked up in “excess reserves” parked at the Fed (Chart 6). As a result, the Fed has had a free hand to be a major participant in both Treasury auctions and business/mortgage finance without sending money growth into the stratosphere.
In contrast, the Canadian money multiplier for M1 or M2 has actually grown over the past few months (Chart 7).
As a result, even a much lighter unsterilized program of securities purchases would threaten to create an explosive pace to money supply growth as the initial purchases created room for additional lending. Even if the Bank were willing to let the overnight rate fall below the target, holding the impact on money growth might constrain the unsterilized part of the program. Only in the unlikely event that Canadian core inflation goes negative on a sustained basis, would we expect the Bank to launch an all-out war on deflation that also pumped up money growth.
Tug of War on Yields
Still, even a change in the mix of Bank of Canada assets could have an initial impact on either spreads or the slope of the yield curve. A central bank that had no inflation
Chart �US Money Multipliers (Money Supply/Monetary Base)
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Chart 6A Ballooning in US Bank Excess Reserves
Chart 7Canadian Money Multipliers Have Risen
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CIBC World Markets InC. StrategEcon - April 6, 2009
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Chart 8Fed Buying Impact on 10-Year Yields Faded
multiplier has completely broken down. A quick uptick in the money multiplier would send money growth soaring, and force the central bank into a tough call on how fast to dump bonds and other products back onto the market.
If the Bank of Canada goes down the path of quantitative easing, the first dose of monetary retightening, as a recovery takes hold, would not be an overnight rate hike. Instead, it would entail reversing the Bank’s asset purchases by selling bonds back to the secondary market. Anticipating that response, we’ve pushed back any Bank of Canada overnight rate hikes beyond our forecast horizon. That will help keep 2-year yields more stable than those further out the curve, and promote a steepening in 2s-30s (Chart 9), as it reinforces the Bank’s earlier message that it will maintain near-zero short rates until growth is strong enough (i.e. above 2 ½%) to begin narrowing the output gap.
Even if a spike in inflation doesn’t materialize in the US, monetary retightening will be accompanied by substantially higher rates across the curve, as the Fed unwinds its balance sheet moves by selling bonds that it accumulated under a monetization mandate. That has us retaining our bearish view on long bonds, particularly Treasuries, with Canadas set to outperform. To the extent that loose global monetary policy, including quantitative easing, boosts inflation concerns down the road, that should be a positive for commodity-linked currencies like the Canadian dollar.
Chart 9Canadian Curve Set to Steepen
concerns could go as far as putting a ceiling on any given government yield by agreeing to buy up any excess supply at that yield, as the US did for both bills and long bonds during the 1940s. Two-year yields are already well anchored by the pledge to hold overnight rates down, but look for five-year yields to also be capped for the coming two quarters below 2.25% as the BoC launches its version of QE.
The Exit Plan
Either QE or CE could end up being only temporarily effective in holding longer yields down. The initial moves in both Treasuries and Gilts from announced central bank buying have been cut in half over the last little while (Chart 8). The Fed has had a more lasting impact on 30-year mortgage rates through its interventions in the MBS market.
Unfortunately, even near-zero short rates, let alone bond purchases that pump up the money supply, are a double-edged sword for long bond yields. A more aggressive monetary posture today should presumably hasten an economic recovery, and diminish the odds of an extended disinflationary period. However, it also raises the risk that policy makers will mishandle the timetable for unwinding unprecedented amounts of fiscal and monetary stimulus, leading to run-away inflation.
These risks are much more acute in the US, where the historical link between the monetary base and the money
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CIBC World Markets InC. StrategEcon - April 6, 2009
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After last year’s spike, current oil prices of around $50 a barrel appear to be a bargain. The reality, however, is that even at this recessionary level, real oil prices are $15 higher than their long-term average. And with the eventual global economic revival, oil prices will rise alongside the global economy, albeit not materially until 2011.
The longer-term climb in energy prices that we’ve already seen threatens to alter agriculture and food systems. The foundation of the modern agri-food system has rested on cheap energy, given the need to maximize yields in the face of constraints on arable land supply. But a recovery in oil prices, and the potential impact of environmental policies to restrain its use, will turn this model on its head. The agri-food system is highly energy intensive, and as energy prices rise, so does the cost of growing and delivering the food. That will lead to a significant shift towards less energy-intensive methods—read organic. Ditto for the globalization of food that was largely fuelled by cheap energy. But with the cost of transport potentially exceeding the actual cost of many products, we will witness a significant cut in food miles—internationally via reduced imports, and locally via re-localization of farming. The environmental movement is also promoting such a shift in consumer attitudes. That will also mean smaller farms, as the recent concentration of supply (large farms) led to a rising distance between the point of production and the point of consumption.
Food and Energy: An Inflationary DuetBenjamin Tal
No Deflation in Food Prices
We are already seeing fundamental change in the way food prices behave in the midst of a deep global recession. While US CPI inflation is already at zero, food inflation is still running at a red hot 5%. With the exception of 2004, the gap between food inflation and core inflation is the largest seen since the food crisis of the 1970s (Chart 1). And this isn’t just a US story, as large, if not larger gaps between food and inflation are sprouting up all throughout the world (Chart 2). So it’s not about local factors, like a poor harvest in particular regions, but rather about global conditions.
The gap between food and inflation is particularly puzzling given where we are in the cycle. Over the past 40 years, food inflation tended to lead the inflation cycle by roughly 4-5 months (see circles in Chart 3), but this time around the pattern has not only been broken, but effectively reversed with food inflation lagging the decline in overall core inflation.
Clearly there are some fundamental structural shifts going on that are overwhelming the cyclical forces that would normally prevail over food inflation in the midst of one of the deepest post-war recessions on record.
Chart 1Ratio of US Food Inflation to Core Inflation
Chart 2Huge Gap Between US Food and Inflation Also Found Worldwide
Food Inflation Still High in the US...
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CIBC World Markets InC. StrategEcon - April 6, 2009
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Disequilibrium in the Global Food Market
One of those shifts is the growing global demand for meat, which has been advancing at twice the speed of population growth. Currently, we consume close to 90 pounds of meat per person a year globally—up from 60 pounds in the 1970s. And despite the recession, meat consumption in the US did not fall in the past year and, in fact, it is still almost 5% higher than it was during the past decade. Recession or no recession, Americans still consume their meat (Chart 4). Nor has meat consumption fallen notably in China during this recession. More importantly, at more than 120 pounds per capita a year, it is now more than double the consumption seen a decade ago.
More meat means more grain—a lot more. It takes close to seven pounds of feed to produce a pound of beef or pork, and about two-and-a-half pounds of feed to produce a pound of chicken. So when world meat consumption soars, we have to grow a lot more grain just to accommodate for the additional feed demand. That is why demand for oilseeds and grains grew faster than supply in eight of the last nine years. During that period of time, world grain inventories have fallen by 50% and are at the lowest levels on record (Chart 5).
Chart �The Global Grain Market
Chart �America's Meat Consumption Is Not Falling Despite Recession
Chart 6Rising Yield, Not More Harvested Land, Keeps Per Capita Grain Production Stable
Chart �Food Prices No Longer Leading the US Inflation Cycle
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CIBC World Markets InC. StrategEcon - April 6, 2009
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Growth in world food production over the past several decades came entirely from productivity gains or rising yield per hectare. Harvested land usage was relatively constant over the past two decades while yield per hectare is currently at 3.7 million metric tons—a 35% improvement over the past 20 years (Chart 6, left). And that is why per capita global food production has not fallen despite the urbanization demands of huge increases in world population (Chart 6, right).
Farming is Energy Intensive
But productivity gains in agriculture are extremely dependent on ever greater energy inputs and hence, hugely vulnerable to higher energy prices. Vast amounts of oil and gas are used as raw material and energy in the manufacture of fertilizers and pesticides, and as energy for all stages of food production: from planting, irrigation, feeding and harvesting, through the processing, distribution and packaging, not to mention the energy needs of the infrastructure needed to facilitate this industry. Industrial food supply accounts for no less than one-fifth of total energy use in the US.
But by far the single most important factor in the growing use of energy in farming is the ever greater dependency of today’s farmers on fertilizers. Just like in the oil market, fertilizer demand is coming predominantly from developing countries. Over the past decade, China and India have increased fertilizer usage by 40% and 55% respectively. In fact, fertilizer consumption in the US and
Europe was hardly changed. Asia accounts for 54% of the market (Chart 7) and, in fact, the US is now the largest importer of fertilizer given that since 1999, 40% of its fertilizer industry has been shut down. As with oil, one of the reasons for the strong demand from Asia is fertilizer subsidies, roughly 10-20% of cost.
A gradual rebound in energy costs is bound to be reflected in food prices, unless energy intensity in the sector falls dramatically. But despite the high cost of energy of the past five years, agriculture has not been able to materially reduce its energy intensity. In the last decade, the rate of improvement in energy intensity has become marginal (0.5% per year), compared to as much as 4.5% per year improvements during the 1980s (Chart 8). A key reason preventing further reductions in energy intensity is the fact that for crops like wheat or corn, fertilizer represents anywhere from 50-70% of the total energy used.
With so much of the energy used derived from fertilizers, organic farming is the only way to materially reduce agriculture’s energy intensity in the short term. Since organic farming does not use fertilizers, it is significantly more energy efficient. For example, it takes 30% less energy to produce a pound of organic corn than it takes to produce a pound of conventional corn. Ditto for soybeans where the energy savings is close to 20% (Chart 9, right). While organic farming has skyrocketed lately and has doubled in volume over just the last five years, it still only accounts for only 2-3% of the market in the United States.
Chart �title
Chart 7Global Fertilizer Demand
Chart 8Improvement in Agriculture Energy Intensity (Per Year)
Growth
80
90
100
110
120
130
140
150
160
170
93 95 97 99 01 03 05 07
Rest of the WorldAsia
Index 1993=100
Source: Bloomberg, IFA and CIBC
0.00.51.01.52.02.53.03.54.04.55.0
78-88 89-98 99-08
%Distribution
Others8%
Latin America
10%
N. America 14%
Europe 14%
Asia 54%
CIBC World Markets InC. StrategEcon - April 6, 2009
11
Energy Also Used to Move Food
Energy is not just being used more to grow food, it is also being used to move food all around the world like never before. A food mile is the distance food travels from where it is grown to where it is ultimately purchased. And food appears to be traveling further and further these days to dinner plates all over the world. Agricultural imports more than doubled in the US over the past decade. For some foods like seafood, the increases have been nothing less than striking. Whereas in 1980 Americans imported 40% of their seafood, today they import 70%. And likewise, in 1980 America imported only 10% of its lamb from abroad, today it imports 40% (Chart 10).
But it’s not only about international trade; even more important was the trend towards a larger and more concentrated farming system. The average size of a farm is now more than twice the size of farms seen in the 1950s (Chart 11, left). Farms with fewer than 50 acres comprise less than 2% of all farmland in the US, while farms with more than 1,000 acres represent two-thirds of all farmland (Chart 11, right).
This concentration led to a situation in which close to 50% of domestic US food is coming from only four states. So even domestically, the concentration led to a significant rise in the food odometer.
In fact, if you sum up the distance travelled by the food items consumed daily by the average American for breakfast, lunch and dinner, you get roughly 37,000 miles. That’s almost 50% larger than the circumference of the earth.
The current disconnect between food inflation and overall inflation is an early sign of the upcoming changes in the economics of food. While fuel prices will remain subdued through 2010, a global recovery will have them rising more materially again beyond then, particularly if carbon taxes or emissions permits are imposed. In an effort to reduce energy intensity, farmers will increase organic food production whereas the food system as a whole will reduce its dependency on imports, and will become much more localized.
Chart 9The Organic Market
Chart 10US Food Imports
Total Sales
0
5
10
15
20
25
90 93 96 99 02 05 08
$Bn
Note: still only 2.5% of total sales
Chart 11US Farms
Most Farmland is in Large Farming
Operations
05
1015202530354045
0-49
50-1
49
150-
499
500-
999
1,00
0-9,
999
10,0
00+
Share of all farmland(%)
Mean Farm Size in US
50
70
90
110
130
150
170
190
1850 1890 1930 1970 2005
hectares
Source: US Department of Commerce, USDA, CIBC World Markets Inc.
Source: Economic Research Service/USDA, CIBC
Source: D. Pimpentel, Cornell University, CIBC World Markets Inc.
0
10
20
30
40
50
60
70
80
BeefLam
bFis
hFru
its
Vegeta
bles
1980
2007
4
6
8
10
12
14
16
80 85 90 95 00 05 08
% of Total Food Consumed
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Corn Soybeans
Organic Conventional
Fossil Energy Input/Food Energy Output
kcal
CIBC World Markets InC. StrategEcon - April 6, 2009
12
CANADA
ECONOMIC UPDATE
UNITED STATES
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First quarter GDP now looks headed for an annualized drop of over 7%, and while that’s likely to capture the worst of the declines, even a Q4 recovery will have GDP off 2.7% for 2009. The reluctance of the US and Canadian household sector to respond to lower interest rates with renewed borrowing will see a sub-par ex-pansion through 2010, with the pace of growth insufficient to prevent the jobless rate from creeping above 9%. All of these forecasts are downgrades from our previous view, and worse than recent Bank of Canada and federal budget assumptions.
The current US recession is already the longest downturn in the post-war period, and based on our new forecast will likely be the deepest as well. Although a string of better-than-expected economic data have caused us to revise up our Q1 growth call, a weaker labour market and bigger drop in nonresidential investment will lower growth in both Q2 and Q3. Massive fiscal spending and unprecedented monetary action by the Fed continue to anchor our belief in a modest economic recovery, but this should only kick in late this year. Significant eco-nomic slack and plunging year-over-year energy prices will keep weighing on inflation. However, the Fed’s large quantitative and credit easing program raises the risk that inflation fears heat up in 2010 and beyond.
CANADA 08Q4A 09Q1F 09Q2F 09Q3F 09Q4F 2008A 2009F 2010F
Real GDP Growth (AR) -3.4 -7.3 -2.4 -0.5 2.5 0.5 -2.7 1.5
Real Final Domestic Demand (AR) -4.9 -2.2 -1.8 -0.1 2.6 2.5 -1.5 1.8
All Items CPI Inflation (Y/Y) 1.9 1.4 0.8 -0.1 0.9 2.4 0.7 1.5
Core CPI Ex Indirect Taxes (Y/Y) 2.2 1.9 1.6 1.2 0.8 1.7 1.4 1.1
Unemployment Rate (%) 6.4 7.6 8.5 8.8 8.9 6.1 8.4 9.0
U.S.
Real GDP Growth (AR) -6.3 -5.1 -3.4 -0.1 2.6 1.1 -2.9 1.8
Real Final Sales (AR) -6.2 -4.2 -4.8 -1.1 2.1 1.4 -3.1 2.1
All Items CPI Inflation (Y/Y) 1.6 0.0 -0.9 -2.1 0.5 3.8 -0.6 2.8
Core CPI Inflation (Y/Y) 2.0 1.7 1.5 1.1 1.5 2.3 1.5 2.2
Unemployment Rate (%) 6.9 8.0 8.8 9.6 9.8 5.8 9.1 9.7
