Structural changes bode well for profitability

Are the good times in the grain industry going to last this time? Is the relative buoyancy and profitability that we’ve enjoyed most of the last five years the new normal? Or is this just a temporary bubble that will explode like so many times in the past?


These are important questions as producers make decisions about buying and renting farmland and as young people decide whether to return to the farm.


There are compelling arguments for grain prices to remain strong. Analysts point to the growing world population and the burgeoning economies in China and India. 


However, analysts have been saying much the same thing for decades. Yes, people need to eat and they aren’t making anymore farmland, but over the last 30 years there have been more grain gluts than shortages.


The old-timers on coffee row aren’t fooled. 


“Just wait until we get back to $4 wheat and $7 canola. Paying so much for land won’t look so smart then.”


No one has a crystal ball, but there are structural changes in the industry that should mitigate prolonged downturns. Biofuel is perhaps the biggest. 


The U.S. drought and the corresponding increase in corn prices have raised a chorus of voices calling for an end to the Renewal Fuel Standard. The subsidy for American ethanol ended some time ago, but there is still a legislated requirement for ethanol content in gasoline. 


Consumer groups and the American livestock industry have been calling for the requirement to be suspended, at least temporarily. It’s the old food versus fuel debate. 


The Americans have built an entire industry around ethanol production, and that lobby is strong as well. It’s not beyond the realm of possibility that ethanol content standards could be relaxed, but it would likely be a phased approach to minimize market shock. 


New ethanol production facilities are no longer being built, so the importance of ethanol is likely to decline in the years ahead as American corn yields increase.


However, it’s still a major backstop for the grain industry. Never again can crude oil prices remain high without pulling up grain prices. The world knows how to make ethanol and biodiesel, and production could ramp up relatively quickly. 


In effect, biofuel is an insurance policy against grain prices falling to unprofitable levels for an extended period of time.


Another structural change is happening with nitrogen fertilizer. Six years ago, the prevailing wisdom was that no new nitrogen manufacturing facilities would be built in North America. Our natural gas prices were just too high to make manufacturing viable.


Along came hydraulic fracturing. Natural gas is suddenly cheap and plentiful in Canada and the United States. 


Nitrogen manufacturers are making buckets of money because their main feedstock is cheap and production capacity is limited.


The market abhors a vacuum. A bunch of new nitrogen plants are on the drawing board. Not all will be built, but additional production capacity bodes well for keeping nitrogen prices at more reasonable levels. 


Make no mistake. There will again be years when it will be tough to make money in the grain business. Interest rates can’t stay rock bottom forever, crop failures will happen from time to time and there will always be unforeseen circumstances that bite you in the butt.


It’s an exciting time to be a grain producer as long as you don’t overpay for farmland and equipment.

Kevin Hursh is an agricultural journalist, consultant and farmer. He can be reached by e-mail at kevin@hursh.ca.