So are you a sucker for a good story?
Most bad decisions get made when somebody falls for a convincing story that sounds great when someone tells it, but that doesn’t actually turn out to be true. Or not true enough to to create a payoff. Happens in the investing world all the time.
So here are a couple of stories about the potential spreads on high quality Canadian crops I hear some farmers telling at meetings I go to: 1) canola oil’s value will go much higher once everyone around the world figures out just how darned healthy it is; 2) high quality Canadian hard red spring wheat will be able to demand higher and higher price spreads to the cheaper stuff as millers around the world get more and more concerned about quality and become willing to pay for the good stuff.
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If these notions just make you happy and proud about the products you produce on your farm, great! But if you’re using them as crutches to lean on to hobble your way towards higher profit margins in the future, you might want to do a little bit of research. Neither is necessarily true. Both may actually be untrue.
The idea that canola’s healthy nature will allow its present often-positive spread to less healthy oils like soy, corn, palm and coconut to widen a lot further is commonly held among canola producers, but an agricultural commodity market analyst threw some cold water on it during the Canola Council of Canada’s annual convention two weeks ago. In response to a question on this topic, David Jackson said the world’s quickly expanding middle class does indeed care about healthy food and is willing to pay more for it, but that this development of demand doesn’t occur for a long, long time in social evolution. The first thing people do when they get more money is buy more fats and meats. That’s good for vegetable oil prices in general. But it isn’t for a long, long time after they are able to sate their hunger with things like canola oil, pork and beef that they begin thinking about the health impact of the food. The first concern is to be able to get enough calories to subsist, then add in fats and meats to get in higher quality nutrition, then add in a wider range of foods, and only at the very end of the long process begin caring about healthy-versus-unhealthy.
This sounds illogical, but if you think about it, it complies with reality. Look at the obesity epidemic in the U.S., Canada, Britain. Economically speaking we’re at the top of the world food chain, and we take advantage of that status to stuff ourselves with Bad Stuff. And, socially and intellectually, we’re pretty darned farther advanced that places like China and India (I’m not talking individuals here, but about their masses). So why would we think some recent ex-peasant from rural China would quickly begin caring about the saturated fat content of his cooking oil when simply being able to buy more than a dipper full is a big deal to him?
So no doubt more and more people around the world will begin caring about health, but it won’t perhaps be at the rate we’re counting on. And as production increases of all crops everywhere, there’s always pressure on prices. And of course, things like lower-saturated fat soybean oil is a threat on the horizon sometime. So the growth in health demand can help us keep the spread we’ve got, maybe widen it a bit, or stop it from shrinking too much, but we shouldn’t go too soft-headed about the potential we’re facing.
The other story lots talk about is the one that has hard red spring wheat able to crank out bigger and bigger premiums to the soft and lower protein stuff. Sure, millers around the world are getting more and more committed to high quality products, and that’s good for quality wheat. But when they upgrade their plants, or build massive new ones, they often incorporate machinery that allows them to use inferior types of wheat and get away with it. All sorts of blending and tweaking going on at advanced plants. As a manager at the Canadian International Grains Institute told me a few months ago, our biggest quality advantage is with the medium-sized plants in developing world countries, where they want to make quality flour but still need quality wheat to do it.
So while we might want to believe that we can push the spread ever wider, there are limits to how far you can push a spread before humanity’s neverending inventiveness produces a way to substitute something cheaper for it.
We produce a number of the world’s best ag commodities on the prairies. Flax, canola, hard red spring wheat, oats, lentils, etc. Whatever we produce we tend to produce best. But what I hear from the Mr. Market is that while he’s willing to pay a bonus for quality, his generosity only goes so far.
