Grain price drop will have many consequences

Softening grain prices and prospects for a massive carryover will have wide-ranging ramifications, some of which are not yet obvious.

Crop insurance coverage will be down dramatically when details of this year’s programs are announced in the weeks ahead.

Governments sometimes like to take credit for improving per acre coverage levels, even when it’s actually due to higher insured prices based on what’s happening in the marketplace.

Expect governments to make it clear that dropping coverage levels are not their fault.

Per bushel crop insurance price levels in Saskatchewan last year had feed barley at $4.25, canola at $12.36, field peas at $7.43 and hard red spring wheat at $6.80.

Expect 2014 insured prices to be down 20 to 30 percent on most of the major crops, which will drop coverage levels by a corresponding amount.

Fortunately, premiums will also be down.

Sales of new farm equipment will take a hit this year and not just be-cause of lower grain prices. A number of factors are at play.

For one thing, sales have been amazingly strong for the past several years, so much of the pent up de-mand has been satisfied.

As well, new equipment is going to be more expensive. The cost of equipment increases by a corresponding amount as the Canadian dollars fades toward the 90 cent level.

On top of that, interim Tier 4 emission standards and now the final Tier 4 emission standards have added significant costs to new non-road diesel engines.

New equipment sales will slow, but don’t expect the same trend on new grain bins and grain bagging equipment. Millions of tonnes of grain will remain on western Canadian farms when this year’s harvest rolls around. It will create demand for additional storage, even if prices fail to improve.

However, producers will be less inclined to experiment with new crop inputs this year. There may not be much of a cut in nitrogen and phosphate use, but expect fewer micronutrients and fungicide applications.

Many producers are looking for cropping alternatives. It’s hard to get excited about growing more of the same crops that you’ve been unable or unwilling to move. Unfortunately, the search for something more profitable raises the risk of overproduction in many of the minor acreage crops.

There’s no guarantee that comparatively good prices for green peas or yellow mustard will remain that way in the fall.

Contracting some of the expected production at a price you’re happy with can help mitigate the risk, but remember that the price on the non-contracted portion might still be disappointing.

What will happen with cash rental rates and with the price of land? Both are ultimately linked to grain prices and farm income levels, but there tends to be a time lag, particularly with land prices.

Producers have been hungry to rent and buy more land. Many farms have had their best years ever and have strong cash reserves.

Land prices may start to plateau this year, but don’t expect any widespread softening in the foreseeable future.

On the other hand, it may not take long before signs of financial distress start to appear. Some highly leveraged operations could be forced to downsize or even leave the industry. Not all of the aggressive expansion plans included a contingency for canola under $9, wheat under $5 and limited sales opportunities.

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