Previous run-ups in grain prices have always been followed by prolonged spells of depressed markets, says a leading agricultural economist.
However, Richard Gray doesn’t think that will be the case this time around. The University of Saskatchewan professor told delegates attending the Pulse Days portion of Crop Production Week that the biofuel industry has created a significant shift in grain demand.
In the past, high prices were quickly mitigated by a surge in supply, which would be followed by long stretches of slumping grain markets.
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In the new farm economy the troughs will be short-lived because as soon as prices drop it will spark more demand from the ethanol sector and the oversupply of grain will be mopped up in a hurry.
“We won’t sit around with big stocks and low grain prices for big periods of time,” Gray said.
In December, the United States passed an energy bill calling for 136.3 billion litres of biofuel per year by 2022, 42 percent of which will be grain-based.
That’s a future market for 139 million tonnes of corn. To put that in perspective, Canada produced 60 million tonnes of grain and oilseeds in 2007-08.
A lot of that ethanol capacity will be built during periods of low grain prices when plants see an opportunity to maximize their profits.
“If (grain) prices go down temporarily ethanol
capacity quickly gets built to suck it up again,” Gray said.
“The long periods of low prices are much less likely to happen.”
But along with that bit of sunshine comes a few clouds, he said. A downside of the biofuel boom for Canadian livestock farmers is high feed wheat prices and the abundance of alternative sources of cheap, high protein feed in the U.S.
“To some extent the livestock is going to migrate to those distillers grains,” he said.
One producer in attendance asked if that means the western Canadian cattle feeding industry could shift into the U.S. market.
“Certainly the potential is there,” Gray said.
The only way to mitigate that threat is by building a substantial ethanol industry adjacent to the western Canadian livestock sector, but to date he hasn’t seen any sign of that.
Competition for energy crops and the overabundance of cheap protein sources will also cause a fundamental change in grain markets.
Protein premiums for wheat and soybean and corn meal will be a thing of the past. Feed peas will be valued more for their starch than their protein.
Pulse growers asked Gray what this means for their industry. He said there are more opportunities than threats on the horizon, citing two factors in particular:
- Higher feed costs will drive up world meat prices once the market works its way through the current glut of product.
“People in the medium to low incomes are going to be looking for cheaper sources of protein,” said Gray, noting pulses are an excellent meat substitute.
- The continued growth in U.S. corn acres will drive up nitrogen fertilizer prices, highlighting the benefits of planting nitrogen-fixing pulse crops.
One producer saw the soaring input costs as more of a threat than an opportunity for Canadian grain farmers.
“While all of this (biofuel) stuff looks nice and rosy the end result is the farmer isn’t making any more money,” he said.
Gray said input costs will undoubtedly rise but he would rather be a farmer in today’s market of high commodity prices than two years ago when there was no crop budget that would produce a profit.
“This is a year where there can be some black ink rather than red ink,” he told the producer.
