It doesn’t take too much imagination to visualize tightening margins in the grain farming business, but the coming months could be a shock to many producers.
In most areas of Western Canada, crop potential is marvelous. It isn’t in the bin, but it sure looks good. Crop touring is a pleasure. With a big harvest in the offing, producers are still coming to terms with the changing economic picture.
Grain prices have slipped dramatically. While part of that is due to our good production potential, the drop is mostly the result of the big corn and soybean crops expected in the United States.
Markets are always unpredictable, but building inventories likely mean that lower prices are here to stay for a while.
A Saskatchewan producer recently told me that he was hoping his feed barley would still be worth $5 a bushel off the combine. He obviously hasn’t been paying attention. A more realistic expectation would be $4. And where are canola prices going to end up — $11 a bu. or $10?
And what if we don’t get this crop off in good shape? It recently dropped to just 2 C in a couple of Saskatchewan locations.
We’ve seen widespread frost in August before, and we’ve also seen wet fall weather that has turned harvest into a nightmare.
Feed wheat prices have been amazingly strong over the past year because little low quality wheat was available. In years with lots of quality-challenged wheat, grade discounts can be cruel.
In recent times, there have also been limited quantities of low quality canola. Companies have been advertising, wanting to buy canola with high green counts and canola that has been heated. In years with lots of frozen canola, markets and reasonable prices aren’t so easy to find.
Maybe we’ll sail through the harvest of 2013 achieving both high yields and high quality. That would certainly help maintain profitability.
However, an earlier than normal frost could be highly damaging. Poor quality in combination with generally lower prices would be a double whammy.
It’s easy to spend money when times are good. Fertilizer rates have been increasing and more fungicide than ever has been applied in an attempt to maximize yields.
No statistics are readily available, but it’s a safe bet that most of us have far more invested per acre in equipment than ever before. Much of this is bought and paid for, but lots of equipment has been purchased with borrowed money.
Producers who have expanded in recent years may also have significant land loans. Even modest interest rate increases in upcoming years will see that cost rise dramatically.
Land rental can be a big expense. Good crop or bad, many producers are paying land rent of $60, $70 and even $100 an acre.
Dropping grain prices and the possibility of more grain with quality downgrades is good news for the livestock sector.
Cattle feedlots have suffered through some terrible times. As feed prices drop, feedlots will be able to pay more for feeder cattle. The economics could also improve for the long-struggling hog sector.
These new realities are still coming into focus, but it may no longer be a seller’s market in the grain business like it has been in recent years.
Meanwhile, cattle and hog producers may have a shot at improved profitability.
The pendulum has reversed direction. Now it’s a question of how far the other way it’s going to swing.