Uncertainty has loomed over Canada’s economy for the better part of the year. Graeme Crosbie, a senior economist at Farm Credit Canada (FCC), was the keynote speaker at the Progressive Dairy Operators’ Farm Show Banquet on Sept. 11 in Woodstock, Ontario, to discuss the dairy industry’s trade environment and provide an update on the current economy.
“If I was giving this presentation a year ago, it would have been a lot simpler,” Crosbie said.
At that time, projections were based on supply and demand fundamentals. Since then, things have turned upside down.
It is tied to the geopolitical environment we’re in, and “a lot of it starts and ends with the relationship with the United States,” he said.
The most recent election of Donald Trump brought about what Crosbie suggested as the reintroduction of mercantilism – an economic practice from the 16th to 18th centuries where nations sought to grow global wealth through promoting exports and curbing imports through tariffs.
Crosbie said, “[Mercantilism] is best summed up as there are no win-win solutions. So when it comes to international trade, if I win, you have to lose.”
It is also why the U.S. tariff rates that had been lowering for the last 75 years suddenly jumped to almost 20% in the last year alone.
This is all leading up to the planned six-year review of the Canada-United States-Mexico Agreement (CUSMA), which is set to occur next year.
Macroeconomics
While trade issues do dominate the headlines, what is happening domestically in the economy is just as important for dairy farms to understand.
The Bank of Canada, which is responsible for charting the course for monetary policy, would release a set of economic projections for Canada’s gross domestic product (GDP) every three months.
“They’ve kind of put a stop to that in the last six months, just because they themselves are so uncertain about how the trading environment is going to evolve,” Crosbie said.
He showed their most recent set of projections that had three different paths for inflation – if tariffs remain where they are at today, Canadians would see some increase in inflation; if the tariff situation de-escalated, inflation would decrease; or if it starts to escalate, inflation will increase even higher.
“I would argue that we’re still more or less following that current tariff scenario to date, but things could change at any moment,” he said.
Core inflation has been slowly but surely increasing this year, due in part to tariffs. But it is the chill on business investment and business planning that the threat of tariffs have really made an impact.
In February, the Bank of Canada surveyed some businesses on the threat of tariffs, and the results showed nearly 40% said they planned on decreasing their level of employment, and almost 50% said they planned on decreasing their level of capital expenditures.
“[The threat of tariffs] is impactful on the GDP calculation today, but more importantly, it’s delaying investments that are going to enhance economic growth in the future,” Crosbie said. “The longer the uncertainty with the trading relationship with the U.S. maintains itself, the fewer business investments we’re going to see and the potential for economic growth down the road is really going to be hammered.”
The Bank of Canada is also watching the growing weakness in the labor market and the unemployment rate that was back over 7% in July.
This led Crosbie and his economist team to ask if Canada is in a recession. At the time of his presentation, technically it was not, but he anticipated the Bank of Canada will want to provide some rate cuts to give the economy a little boost through the remainder of the year.
To sum up the macro side, he said GDP growth will be low, the Bank of Canada likely has two and maybe three more rate cuts coming before the end of 2025, the Canadian dollar will remain low, and longer-term fixed rates have limited potential to move significantly lower. This is all barring a black swan event that could cause central banks to panic.
(Note: On Sept. 17, the Bank of Canada cut their key rate by 25 basis points.)
Dairy demand
As inflation took off, consumers decreased the amount of household income spent on food, but in the last couple of years, there has been a slight reversal.
That is especially helpful as there has been a slowdown in population growth.
Given the supply-managed structure of the dairy sector, population growth is something to be mindful of.
“If population growth is slowing as a source of additional sales for dairy products, we have to look at other ways to boost the bottom line, at least for sales,” he said.
One way to do that is relative price competitiveness of dairy products compared to other products that consumers have at their disposal. Crosbie reported that in July, the price of food purchased from stores was up 3.4%. With milk only up 2.1% and both cheese and butter slightly down, dairy products are remaining competitive.
Demand for dairy products, especially yogurt and ice cream in the first half of the year, was positive, but not quite as high as before.
This is also reflected at the processor level.
“In the P5 this year, we’ve seen more milk being diverted into Class 2 and Class 3 products to meet that demand, more than we’ve seen in recent history,” he said.
Despite the growth in butter consumption, a lot less milk has been going into butter. This led Crosbie to believe butter stocks must be high, but he has noticed a diverging trend in the reporting of butter stocks between the Canadian Dairy Commission (CDC) and Statistics Canada since 2023 that makes it hard to be certain.
Heading into the fall season, a high-demand period for butter, the amount of milk going into Class 4 and how much the stocks change could really dictate future incentive days or any potential quota increases in 2026, he said.
Farm inputs
Crosbie mentioned a massive corn crop expected in the U.S. will put a lot of downward pressure on the price of corn. “If you’re looking to purchase any corn, you might be able to find a decent bargain,” he said.
The large U.S. corn crop had a significant impact on the demand for nitrogen, which is partly responsible for the increase in the price of urea over the last 18 months. However, most of it is due to geopolitics and the concentration of production. A lot of nitrogen is produced in some unstable parts of the world, namely Russia, the Middle East and China.
“Given the instability that we find ourselves in, there’s been a bit of a squeeze in the supply of nitrogen globally, and that’s caused prices to stay elevated and may cause them to stay elevated for a bit longer,” Crosbie said.
Over the last couple of months, China has started to let some nitrogen hit the market, which would put some downward pressure on prices.
Profitability outlook
A nice side benefit for Canadian dairy farms has been the strength in cattle prices over the last couple of years. In Canada, it looks like some ranchers have started to retain some breeding stock and are looking to rebuild herds, but that isn’t evident in the U.S. yet. “As long as the demand side of the equation holds up, there’s nothing to indicate on the supply side that cattle prices are going to take a take a hit in the next year or two,” he said.
Crosbie is estimating an aggregate total revenue for the Ontario dairy industry would be a growth rate of 2.9% this year, based on an increase in milk production.
Looking ahead at the CDC cost of production study, the industry could see a support price bump effective next year. However, a lot of question marks remain, and producers will need to wait for the release of the study to know what the actual recommendation will be.
In conclusion, Crosbie said gross margin estimates show 2025 is shaping up to be a decent year for the P5. It will not be as profitable as 2024, but certainly a better year than five or six years ago.
