Speculation that oil is heading into a “super spike period,” when prices could in a couple of years double to as much as $105 US per barrel, is enough to send chills down most farmers’ spines.
In a widely reported paper, investment bank Goldman Sachs last week noted strong oil demand from the United States, China and India and little spare oil production capacity could push the oil market into an environment not seen since the 1970s, with oil prices in the range of $50-$105 per barrel.
“We believe oil markets may have entered the early stages of what we have referred to as a ‘super spike’ period, a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return,” Goldman’s analysts wrote.
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Although $100-plus oil prices sound unbelievable, the bank notes that even with the increase, Americans would spend less of their income on gas than they did in 1980.
Still, it is hard to picture how farmers could cope with such an increase if it did come to pass.
Diesel prices are already shockingly high. Between February last year and this year, the cost of farm diesel in Alberta rose 34 percent, and that was before the recent spike.
While the super spike concept was the eye popping part of the controversial Goldman Sachs report, equally disturbing was its forecast that oil would average $55 per barrel in 2006.
Only weeks ago, many analysts said that although world demand was rising, fundamental supply and demand analysis did not warrant oil prices of $55 per barrel and forecasted a return to $45.
If Goldman Sachs is right and fuel prices stay where they are or climb, we’ll soon see manufacturers and others instituting price increases to pass on the new cost.
Unfortunately, in most cases farmers can’t do that. As producers of commodities, they are price takers when buying and selling.
Which leads me to a paper by Al Mussell and RenŽe Mactaggart of the George Morris Centre agricultural think-tank in Guelph, Ont.
The paper is called Uprooting Ourselves From Commodities and Moving Into Differentiated Farm Products: The Needs and the Challenges. It is available by going to www.producer.com and typing George Morris into the Go Box.
The report defines differentiated farm products as those that contain specialty attributes that cater to specific consumer preferences, have identified and proven health traits or are produced with specialty processes or attributes for some other intended use.
Mussell and Mactaggart note that commodity prices are set on futures markets without regard to the cost of production, whereas the price of differentiated products can be set by negotiation and reflect the cost of production and more importantly, the value consumers place on them. Here you might consider the difference between the pennies spent to brew coffee at home and the $3.50 people are willing to spend at Starbucks.
But it is difficult for farmers to break free from the commodity environment. A sophisticated system has evolved to make it function smoothly, rewarding conformity in grades, standards and tolerances. Differentiated products threaten the conformity that makes commodity systems work. For example, in Canada there have been several grain and oilseed varieties with qualities specific buyers desired that were rejected because they don’t meet standards.
Mussell and Mactaggart also note that farmers and their organizations often distrust the companies that buy, process and market what they grow.
This results in poor communication between those who produce the raw product and consumers.
In instances where farmers now produce differentiated products, the price they get is often based on the commodity price plus a premium reflecting the farmer’s extra costs in producing and segregating it. In the end, the farmer sees little benefit.
Alas, Mussell and Mactaggart don’t have a solution for these problems. They note the need for discussion, particularly about the future role of Canada’s agricultural institutions that serve to support commodity marketing, such as the grain commission, wheat board and marketing boards.
The topic is sure to be discussed as the agricultural community and federal government try to figure out the reasons why farm income has become inadequate.
Considering rising oil prices and the burden they will put on farmers, finding a solution is becoming ever more urgent.
