Agronomist Notes
My world traveling adventure has come to an end earlier than planned: my new born daughter decided to join the world prematurely, bringing me home from the middle of Brazil. Thankfully, all is well. It’s awesome to be back at home and I have a new perspective on how beautiful and wonderful a country and province we live in. There’s no other place I’d rather be.
I must say I’ve had an amazing journey travelling around the world studying agriculture. I look forward to six more weeks of travel this winter as I study precision ag processes and technologies. It’s difficult to recap in one paragraph what I’ve learned along the way but in a nut shell, if you think farmers somewhere else in the world have it easy, they don’t. All producers struggle with low returns on investment no matter what crop they produce, where they produce it and how subsidized they are. The biggest issues farmers are concerned with are managing risk, climate change policies, water quality, bio-energy, preserving bio-diversity, global food transportation, financial viability, business expansion, succession planning and farm subsidies.
The most exciting thing to see was the fundamental shift going on globally in the way farm businesses are managed and that is the movement towards more business-like structures with risk management at the forefront. Successful farm owners and managers are becoming more business savvy and are gaining a better understanding of managing risk. The new farm manager handles risk by measuring each system within his operation to discover and correct the inefficiencies and increase profitability.
In this week’s newsletter, we’ll discuss Brazil’s potential on the world agricultural scene as well as world producer support payments. You’ll also read my thoughts on hedging production before the crop is in the ground. I’m sure looking forward to talking with clients, producer groups and industry about the information I’ve learned. Have a great week
Agronomy
Brazil Is On The Move
We had the opportunity to sit down with both industry and government to discuss each other’s view of Brazilian agriculture. We started the meeting with the Brazilian national anthem, a very odd but amusing start to an afternoon of Brazilian statistics. Brazil’s greatest challenge in the next decade will be its ability to improve transportation infrastructure. The second greatest challenge will be to ensure food safety.
I’ve heard Brazil called the sleeping giant and you can see by the numbers that they truly are. Production numbers and total acreage potential vary depending on the source. Here’s a summary of Brazil’s agricultural ranking in the world.
Brazil is the number one world exporter of:
- Sugar
- Coffee
- Orange Juice
- Ethanol
- Tobacco
- Soybeans
- Beef
- Poultry
It’s ranked number three world exporter of corn and number four for pork.
The total area in permanent and temporary crops is now 178 million acres. The cerrado region in central Brazil holds another 175 million acres waiting to be developed into crop land. The kicker is that this region could pour out two to three crops per year! Basically, it could add the equivalent of three more US sized corn and soybean crops onto the world market! Brazil knows it has the potential to be the new bread basket for grains and proteins and it seeks to invest a great deal of capital into its biggest weakness: transportation infrastructure.
The comment I found most fascinating was that Brazil would have the transportation problem solved within the next decade. A lofty goal indeed but they are pouring millions of dollars into making sure it happens. Brazil’s vision is to become the world’s largest exporter of agricultural products. If you look at the production statistics above, they hold the potential to blow every country out of the water considering they already rank number one in eight major areas. Time will tell whether they reach their goal but I would caution that other problems will prop up in the meantime. They will find themselves with environmental, food safety, and labor issues and low returns on investment. For example, high world supply will decrease price and reduce profitability at the farm level so fewer acres are developed into agricultural land. It’s a vicious circle that will come in cycles of high grain prices then fall during low grain prices. We’ll have to wait and see. Thankfully they don’t grow wheat, canola, peas or barley in any great quantity. That is, not at the moment! SL
Note: I visited Brazil last January and documented my travels in the January and February 2007 issues of Beyond Agronomy News. You can find them in the archives at www.beyondagronomy.com/archive
World Producer Support Payments
The topic of farm subsidies is a real bone of contention no matter where you go. You’ll even find resentment between farmers in each province of Canada, never mind each country. What I’ve learned is that no matter how high the subsidy, the price of the subsidy gets worked back into the price of land, rent and local retail crop inputs. In the end, the producer’s pocketbook does not see net gain and the very policy put in place to help out financially only goes towards increasing a farmer’s cost of production. In my opinion, subsidies are a detriment to farms and rarely do what they were intended to do.
The producer support payments above may seem high in a few countries but we must understand that farmers are no better off and continue to make a two to three percent return on investment. I say this with confidence after discussing farm profitability with farmers from New Zealand, Australia, Scotland, England, Ireland, Canada, USA, Mexico and Brazil. SL
Producer Support Estimates:
Japan 53.3%
EU25 32.5%
Canada 22.7%
Mexico 17.4%
USA 11.1%
China 7.7%
Brazil 5.7%
Russia 5.2%
Australia 5.5%
New Zealand 0.8
The Practice of Hedging – Risk Management or Just Risky?
After travelling with eight Aussie’s for the past four weeks, we’ve had a few discussions on the impact of hedging our production before the crop is in the ground. Many producers in Australia were hit quite hard during the last two droughts, some four! After hedging a good price for wheat early in the season, producers were stung hard as prices doubled and they didn’t have the production to cover the contracts. They sold what little production they had at a low price, and then bought out the contracts they couldn’t fill because of drought. These scenarios have me asking whether another less risky marketing option is available.
The art of hedging production before the crop is planted has been touted by professionals as a best practice. Perhaps this strategy has worked well over the last few years, but we’ve happened upon five years of decent production. I wonder what impact hedging would have caused if we had hedged 30% of our production during the drought of 2001-02? How many farms would have had to buy out contracts after hedging 20 bushels an acre only to produce 7 bushels at harvest? Last year my hedge of 25% turned into 100% on September 7 after a freak hail storm cleaned me out. My remaining 15 bushel canola crop was sold at $8.00 a bushel while the price climbed to $14.00. Was my hedge a risk management strategy or simply a 50/50 gamble that prices would go down? I would argue that 50/50 odds are unacceptable when hundreds of thousands of dollars are on the line. There must be a better way.
So how do we capitalize on today’s grain prices and at the same time reduce our exposure to production risks? Is there a successful strategy that employs grain marketing after harvest when production is known? If money can be made on up and down markets, could we begin marketing our grain after harvest when the world has a pretty good idea of the year’s supply and demand? When pricing grain before seeding we’re gambling that prices may go down. If you thought prices would go up, then why would you knowingly lock in a lower price? If we waited until the grain was in the bin and thought prices were going to go up, we could leave it in the bin and sell later. Or we could take a long futures position or buy an option. If we thought grain prices were going down, we could sell the grain and take a short futures position or a put option. Sounds so simple I know, but I believe there’s a better way to market. SL
Photo Album
We were in Brazil just three days before I got called home. Here are a few pics of what we saw:
- we visited EMBRAPA (Brazil’s version of Ag Canada)
- a tomato farm with pivot irrigation
- a farm harvesting soybeans
- a chicken farm with 18,000 bird open-air barns
Market News
Potentially Dry Summer for Prairie Provinces in 2008
After reading climate reports from Ray Garnett, it looks like three out of the four major indices point to a hotter and drier May-July time period. With soil moisture reserves at low levels going into spring, you may want to rethink drought management strategies. I’m not sounding the panic alarm because we all know how weather predictions go. We’ve had four years of above average precipitation and our wetter weather cycle may be changing. The upside is the sunspot activity index which has a strong correlation to high global wheat prices. When low sunspot activity occurs, high wheat prices are the result. Last year we recorded very low sunspot activity with record high wheat prices and the low sunspot activity looks to continue into 2008.
One Strategy: Look at purchasing hay or stock piling hay in the coming months before the dry weather creeps up. With the huge number of forage acres taken out of production the last two years, hay will be in short supply. Even if you are not feeding animals, purchasing hay and sitting on it for the next six months may give you a healthy return on your investment. SL
Parts of US Corn Belt to be Dry
After four record corn crops out of the US cornbelt, a drier period may be upon them in 2008. Weather patterns studied by Ray Garnett suggest that Iowa will receive a hot and dry summer period. With the excessive moisture this spring, US corn producers may be looking at a late start to planting. Late seeding coupled with hot and dry weather and 8 million less seeded acres adds up to high corn prices in my opinion. SL
The Reality of a Dysfunctional Commodity Market
If you were to add up all of the long positions in the wheat market a week ago, it would have added up to roughly 2.1 billion bushels of wheat. The actual supply of wheat is sitting around 360 million bushels. The 1.7 billion bushel difference held by non-commercial speculators has completely distorted this market to the point is no longer works as it was intended. In fact, today’s futures price is not even reflective of the true cash price at the elevators. The simple equation of futures minus basis equals cash price does not exist today.
The recent drop in commodity prices over the last two weeks is due to the major commodity index funds cashing in their long positions in order to meet huge margin calls as well as reduce their risk and take profits for the first quarter. To give you an idea of money flows, over $6 billion flowed into commodity markets in the month of February alone!
Whenever the US economy begins to weaken, money starts to flood out of equities and into commodities. The difference this time around is the amount of new investment vehicles making commodities a sexy thing to own in your portfolio. The credit crisis in the US and the EU has many investors a little jittery about investing in the stock market at this time. This type of volatility may continue into the years ahead.
I suggest we forget the urge to speculate in the commodity markets and use those funds to purchase phosphate and potash company stocks like Mosaic, Agrium and the Potash Corporation of Saskatchewan. Three things will push potash and phosphate company stocks higher in the future. First is the world’s increasing demand for food, second is increased yield potentials from GM crops, and last is the non-renewable nature of potash and phosphate fertilizer. The potential to gain a 10 to 50% in these stocks is not unlikely. SL
Local Feed Grain Price Update
Spot prices for feed barley are trading between $215 and $230 a tonne in the Calgary area. Feed wheat has been trading for $285 to $290 a tonne. Corn is being railed into Southern Alberta for $255 to $270 a tonne.
Source: Cash Market Value Newsletter
USDA Prospective Plantings Acreage
Corn: 86 million acres. Down 7.4 million from 2007
Soybeans: 74 million acres. Up 11 million from 2007
Wheat: 63 million acres. Up 3.4 million acres from 2007
Source: USDA
Cool Spring Expected on Prairies
Cool temperatures are expected in most Prairie province regions this spring while precipitation forecasts range from below to above average, according to industry experts. Alberta, meanwhile, is expected to experience warmer than average temperatures, especially as one moves away from the southeast corner of the province.
Not Owning Land Can Strengthen Your Business
Ever since the Great Depression, owning land has been an unwritten tenet of farming – a belief that a land-title deed is the best protection against a bank foreclosure and forced exit from agriculture. But Laura and Norman Shoemaker are part of a growing number of producers who believe that not owning land – or at least, not too much land – makes your farm business stronger.
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