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TORONTO, ONTARIO--(Marketwire - April 28, 2011) -

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After two years of contraction, Canada's agricultural sector is set to grow this year amid expanding global economic activity, improved financial conditions, and stronger prices, according to the Canadian Agricultural Prospects report released today by BMO Economics.

"Momentum from the second half of last year has carried over into 2011, with farm output up 3.3 per cent from a year ago in January," said Kenrick Jordan, Senior Economist, BMO Capital Markets. "Better prices, healthier global economic activity, and improved financial conditions will support the sector's expansion this year."

Overall, the agricultural sector is likely to expand by between 3.5 per cent and 4 per cent this year, although there is a risk that flooding could constrain yields. The crops segment is slated to grow at a somewhat faster pace than its livestock counterpart, where activity will be limited by smaller breeding herds and high feeding costs. Canadian farmers are likely to continue to experience solid financial performance this year, with crop and livestock prices expected to remain buoyant and output rising on stronger demand and improved yields.

"Our agriculture customers tell us they are well poised to capitalize on this opportunity," said David Rinneard, National Manager, Agriculture, BMO Bank of Montreal. "We have remained committed to agriculture and its producers, recognizing farming is a critical, strategic, and viable component of Canada's economy."

Challenges:

The report does identify some potential challenges for Canadian farmers:

• Prices for energy, fertilizer and feed have been rising again lately and are likely to remain high by historical standards, with greater variability.
• The strength of the Canadian dollar will continue to constrain exports, production and profitability, especially in those segments that are heavily dependent on foreign markets.

Solutions:

To address these challenges, Mr. Jordan said Canadian farmers must:

• Continue to cut costs through greater scale, technological advances and improved organization;
• Increase value-added by catering to shifting customer preferences; and
• Boost sales to fast growing markets, where low per capita consumption and brisk income growth are lifting demand.

Mr. Jordan added that while the fortunes of Canadian farmers have brightened, rising farm prices have put upward pressure on food prices at the consumer level. "Consumer food price inflation has begun to pick up and this trend is likely to hold over the next several months. Overall, though, the increase in consumer food prices will be markedly less than that for primary crop and livestock products, given the small share of farm products in retail prices, the fairly small and declining share of household budgets spent on food, and heightened competition among retailers."

The full report from BMO Economics can be downloaded at bmocm.com/economics.

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