Greg Kostal likes to hear stories about grain demand because, like the classics of literature, they have staying power.
The independent analyst, consultant and president of Kostal Ag Consulting in Winnipeg says oilseeds and corn have taken the lead in agricultural markets because they have a demand story to tell.
Wheat lost its dominance because its story was largely about supply. A supply problem can often be fixed in one year, but it takes longer to catch up to rising demand.
Kostal told farmers at a meeting in Saskatoon sponsored by CGF Brokerage, that farmers around the world this fall increased wheat acres to make up the deficit that developed when Australia, Ukraine and the United States harvested small crops.
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If that increased wheat area makes it through to harvest next year, supply will likely match static demand and wheat prices in 2007 won’t be as strong as they were this year.
Farmers around the world also plan to increase corn and oilseed acres, but because the story for them is about demand, not supply, the price outlook is strong.
Biofuel is the new plot twist. Ethanol and biodiesel have increased demand expectations to a higher plateau. It will take years for farmers and the rest of the agricultural industry to match the new demand requirements and, during that time, prices should remain strong.
The needed adjustments seem almost endless.
Kostal thinks the U.S. will adjust largely to meet its ethanol demand, increasing corn area and reducing soy acres. Soy production will migrate to South America where there is still undeveloped land that can be moved into crops.
Demand for Canadian canola will increase due to biodiesel needs, prospects for the European Union to start accepting genetically modified canola, and the move to eliminate trans fats. Also, advances in canola varieties and agronomics will widen its attractiveness over wheat. Other countries with lower wheat costs of production will likely increase their wheat area and Canada’s wheat crop will shrink to meet domestic needs of millers and the expanding ethanol industry.
Another adjustment will be that breeders around the world will work hard to deliver super high yield varieties designed for the biofuel industry.
Sustained higher grain prices will also start to put pressure on land values. If an acre is able to generate higher revenue, the value of that acre will increase, particularly if mortgage interest rates remain low.
Eventually, production will catch up to demand and grain production profitability will slide back, but the next few years should be better for producers than recent ones.
