Can the Bank of Canada Pull Off a Second Soft Landing?

The agricultural sector is one of the first channels through which geopolitical shocks are passed on to the Canadian economy. Agriculture is especially sensitive to swings in global energy markets because it’s heavily reliant on diesel fuel and nitrogen fertilizers, whose production costs closely follow natural gas prices. That said, these impacts typically emerge later in the agricultural production cycle.

Natural gas accounts for 70%–80% of the production costs for nitrogen fertilizers like urea and ammonia. The current friction in the Strait of Hormuz is disrupting exports from Gulf producers, particularly those in Qatar and Saudi Arabia, and ultimately affecting global markets.

Domestic natural gas prices are still in line with the North American benchmark (Henry Hub), but agricultural producers are continuing to feel the sting of higher global fertilizer prices, which have been pushed up by the increased energy costs in Europe and the Middle East, and by the contraction in global supply. According to international benchmark data, prices are up by 30% to 50% from the start of the year, putting upward pressure on field crop production costs. In Quebec and Ontario, grain corn (a dominant crop and key input for livestock feed) is most exposed to this pressure, whereas in the Western provinces, the impact will be more pronounced for wheat and canola.

The agricultural sector absorbs these shocks with a lag, due to its production decision calendars. Acreage, crops and fertilizer rates are all determined several months before the planting season begins. At this point, producers have already negotiated or secured a substantial portion of their inputs for 2026. The effects we see this year will primarily stem from higher direct energy costs, such as diesel for equipment and transportation, and surging prices for imported inputs, as freight costs track oil prices. In our base case scenario (graph 1), a gradual easing of tensions in the Strait of Hormuz would limit second-round effects on food prices. Margin pressure on producers would be temporary and would not result in a lasting acreage reallocation.

The risk is that this shock persists. If fertilizer prices remain high over a longer timeline, second-round effects would be greater in 2027. Faced with persistently high fertilizer prices, producers would begin making adjustments, such as switching fields from corn to soybean, reducing the amount of fertilizer used, or letting less profitable acres lie fallow. This would likely affect crop yields and production volumes during the 2027 harvest before driving up dairy and pork production costs.

This shock would then compound existing structural weaknesses. Food prices already underwent a structural change in the first half of this decade (graph 2) that can be attributed to several factors: input costs and import prices both rose, wages grew throughout the supply chain during the pandemic, extreme weather events multiplied and demand jumped.

All of this further complicates the Bank of Canada’s task. In its April 2026 Monetary Policy Report, the Bank calls for inflation to jump briefly before returning to the 2% target in 2027, while warning against the second-round effects of a persistent energy shock. Although it represents only about 17% of the CPI basket, food is a particularly visible pain point for households and therefore plays a disproportionate role in their inflation expectations. Should these second-round effects materialize, the Bank would find itself in a difficult position, forced to further tighten domestic demand even as it is weighed down by multiple headwinds, including slower demographic growth, tariff uncertainty and vulnerabilities in the Toronto and Vancouver real estate markets. Back in 2022, the Canadian economy was able to weather an aggressive tightening cycle and the Bank managed to achieve a soft landing. There is markedly less room for manoeuvre today, and a repeat performance seems much more challenging.