Agronomist Notes

Finally, spring has arrived! A week of 10 to 15 degree weather and the snow has left the fields. I was out scouting for weeds on the weekend and I tell you, we could be seeding peas by the end of the week. If it doesn’t snow, I’ll be soil sampling all week so I’ll have a good idea about frost levels and soil temperatures*. The usual weed suspects like this winter annual cleaver are up and growing along with stinkweed and shepherds purse. 

In this week’s newsletter, we’ll look at factors effecting protein in wheat and look at the economics of fertilizing for higher protein and choosing the right variety. Next, we’ll look at sun spot activity and how it relates to higher wheat prices. I’ll give you an update on crop insurance premiums and the spring price endorsement. Next, Bruce Love will give you an update on reading the fine print in carbon contracts. Finally, we’ll finish with fundamental and grain market analysis along with international crop and weather news. Have a great week. SL

*Editor’s note: It snowed.

Agronomy

Does it pay to increase protein?

Why is it that some producers feel that producing high protein wheat is necessary to achieve greater profitability and some feel the additional cost of the fertilizer won’t pay for the premiums you receive? 
To begin, building protein is more complex than just adding more nitrogen or sulphur. There are three factors that must fall into place to generate high protein wheat: environmental conditions, genetics and fertility.

I’ll briefly describe what type of environmental conditions lead to higher proteins and then follow up with the kind of returns we can generate through variety selection and fertility.

Environmental conditions that increase protein

Weather during the growing season is the overriding factor affecting protein content. It controls two of the major influences on protein content:

• Low in season precipitation 
• High growing degree days (GDD) and days above 30oC during grain fill 
• High soil nitrogen reserve levels (mineralization throughout the growing season adds to available nitrogen)

Variety

Wheat varieties differ in their ability to turn soil nitrogen into protein. Generally, the higher yielding varieties have lower protein contents and the lower yielding varieties have higher protein contents. The table below shows the top seven most popular spring wheat varieties in order from highest to lowest protein contents along with yield comparisons. Let’s run the numbers on yield and protein differences in Zone 2 (Three Hills/Calgary area) to see which varieties offer the best returns.

The eight year average protein premium through the CWB for each 0.1% increase in HRS wheat is roughly $0.01 per bushel. The baseline average yield in this example is 50 bushels an acre at $6.00 per bushel. 

As you can see by the chart, the variety offering the highest net profit when considering protein, yield and maturity is CDC Go at $42.56 per acre. The next highest return comes from AC Superb which is the lowest protein variety on the list but makes up for protein loss in yield. The least profitable variety to grow according to this chart is AC Splendor even though it has the second highest natural protein content, the 6% yield penalty is too much to overlook. This is the first time I’ve run these numbers and I’m thankful we switched to CDC Go last year.    

Fertilization

The one thing we do know for sure is that protein contents increase as the rate of available nitrogen increases provided no other nutrients are limiting. The chart below displays the response curve of protein to nitrogen inputs under three different moisture levels. Unfortunately, that’s where the simplicity ends. In reality, estimating protein responses from nitrogen depends highly on temperature and rainfall during the growing season. We can, however, examine the cost of the nitrogen we remove in our grain at varying protein levels. Is there a point at which the nitrogen removed in the grain exceeds the price you receive for protein? Let’s run the numbers and see what we come up with.

Chart source: Agriculture and Agri-Food Canada

First, if your residual nitrogen pool is low and you’ve been struggling to achieve protein, I’ll give you an example of how much nitrogen you would have to apply to move from 11.5% to 14.5% protein in one year using urea as your nitrogen source.

2.5 lbs N/bu uptake × 50 bu/ac = 125 lbs/ac uptake
125 lbs uptake - 20 (in soil) - (3% OM × 5 lbs/N) = 90 lbs N/ac
90 lbs N/ac ÷ 50% efficiency = 180 lbs of N

Therefore, you would need to 180 lbs of nitrogen to move from an 11.5% protein to a 14.5% protein in one year, if the weather cooperated and provided your crop didn’t lodge. That’s an additional $47.70 per acre in nitrogen costs with a potential net return of $3.30 acre when you move from an 11.5% to a 14.5% in one year; a pretty risky strategy to generate an extra $3.30 an acre. That is why some producers find it difficult to generate a return on the additional nitrogen they require. The process of generating protein must be done over several years to make protein increases cost effective. 

Next, in the chart below, I’ve taken a 50 bu/ac average wheat crop and increased the protein from 11.5% to 16.5%. I’ve calculated the amount of nitrogen that is removed in the grain at harvest and the net revenue gained with each percentage of protein. I’ve used today’s price of $0.53 a pound for nitrogen and the protein premiums reflected in the March 2008-09 #1 HRSW CWB PRO.

The results of this example show a $10.71 net return per acre for each additional 1% increase in protein up to 13.5% and a surprising $21.71 per acre net return when you move from 13.5% to 14.5%. There must be a high demand for 14.5% protein wheat as the premium almost doubles compared to the average. Nitrogen costs would have to climb to $0.73/lb to reach a breakeven level where nitrogen costs outweigh the additional protein premiums. The bottom line is that protein premiums pay for the additional cost of the nitrogen removed in your grain at $0.53/lb and up to $0.73/lb. SL

Calculating nitrogen removal in protein
Divide protein by 5.7 to obtain percentage of N. Multiply 50 bu/ac × bushel weight (i.e. 60 lb) × N percentage and divide by 100.
Example: 13.5 protein ÷ 5.7 × (50 bu/ac × 60 lb/bu) ÷ 100 = lbs of N removed per acre
2.36 N × 3,000 lbs/ac ÷ 100 = 71 lbs of N removed per acre

Sources:
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex95
http://www.cwb.ca/en/farmers/outlooks/PRO/pdf/0910/mar26_0910.pdf

Agronomy

A new tool for predicting global wheat prices

Would you believe there is a link between sunspot activity and high wheat prices? Studies going back to the 1700’s reveal that high wheat prices are strongly correlated with low sunspot activity. Low sunspot activity leads to higher global cloud cover and more precipitation. One would think that would lead to higher grain production but it actually leads to less area harvested, lower quality wheat and lower global ending stocks.

To give you an example, if you look at the graph below, you can see that 1996-97 and 2007-08 were periods of low sunspot activity. Coincidentally, both marketing years had global wheat stock to use ratios of 19.3% and 19.55 respectively, the lowest in over 30 years. These record low ending stocks coincided with above average wheat prices. So what does this mean to use today? Well, 2009 is shaping up to be the lowest sunspot activity in over 100 years. The probability of high wheat prices are very likely considering the strong correlation between the two.

Everything on earth seems to run in cycles and low sunspot activity runs on an eleven year cycle. With that in mind, researcher Ray Garnett from the University of Manitoba who uses sunspot activity as a prediction tool will argue that 2009 will be a wetter than normal year on the Canadian Prairies. He continues to contradict Environment Canada’s model that calls for a hotter and drier than normal summer in 2009. With inflation looming on the horizon, 5 million less wheat acres in the US and a new customer like Iran, who is now the world’s largest net wheat importer, wheat prices are looking fairly bullish in 2009. Coincidentally, we have another year of low sunspot activity. Interesting don’t you think? SL

Hard red spring wheat offers the least amount of risk in 2009

After pouring over crop insurance coverage on wheat, barley, canola and production costs, it seems wheat is the shining star on our farm this spring. In our situation, we can get $213 per acre production coverage at the 80% level for $13.73 acre or 6.5%. Our production costs for wheat are $207 an acre including $40 per acre rent and $55 an acre fertilizer. Canola, on the other hand, will cost us $242 an acre with only $187 an acre coverage at the 80% level or 9.2%. The insurance premium for barley is 6% for $177.00 coverage but costs us $196 per acre. In the end, we would be insuring for a loss on canola and barley but not wheat. We’ll choose the 80% level this year knowing our hail rates are cheaper through AFSC. 

This year, the value of the spring price endorsements for wheat, barley and canola are very low. Wheat, barley and canola prices must fall below $5.45, $3.32 and $7.95 per bushel, respectively, before pay out begins. To break even on the cost of the insurance premium, wheat, barley and canola prices must fall below $5.16, $3.18 and $7.69 per bushel respectively. Wasn’t it only three years ago that I would’ve jumped at these prices? My, how times have changed! SL

Read the fine print

April 13, 2009- Carbon aggregation contracts come in all shapes and forms as the carbon market creates itself. The carbon market is still relatively new in Alberta and contract terms vary widely, particularly in agriculture. So, in this new market it really does pay to read the fine print and understand what you are getting yourself into.

The typical aggregation contract either has the aggregator acting as a broker for the farmer, or as a buyer of the carbon credits from the farmer. As a broker, the aggregator assumes very little risk, representing the farmer to potential buyers. Once the carbon is sold, buyer recourse is to the farmer and not the aggregator acting as broker. When the aggregator acts as a buyer of the carbon, the buyer of the offsets typically has recourse against the aggregator. Then the aggregator can then choose to pursue the farmer if there is a problem.

So what would cause the buyer to want to take action against the aggregator selling carbon credits or Green House Gas (GHG) offsets? Accuracy of the GHG offset claim, or number of carbon credits. In the Alberta compliance system, a Large Final Emitter (LFE) will most likely buy GHG offsets to meet their compliance obligations. Once the LFE delivers the offsets to the Government, they are subject to audit. If the audit turns up inaccuracies the offsets may be rejected in part or in whole. At that point, what does the buyer (LFE) do? The Alberta compliance system does not recognize the offsets as good for compliance prior to their submission for compliance purposes, so its “buyer beware.” This means it is up to the LFE to ensure that the claims made by the aggregator of the offsets are accurate. In addition, the buyer may require the aggregator to post some form of insurance or guarantee that in the case of the offsets being reduced or eliminated by an audit, that some recourse is available to make them whole.

How accuracy risk is handled will differ between approaches. As a broker, the risk will likely fall back to the farmer. In this situation, the farmer should be comfortable that the aggregator knows what they are doing. Since the farmer may end up dealing with the LFE if there is a problem. As a buyer of the offset, the farmer needs to understand the recourse the aggregator has against the farm. It may simply be loss of some or all of the offsets, or a claim against future offsets. Regardless of the approach taken, this risk should be understood in the contract before signing.

Once you understand how risk of default is handled in the contract, now you can move on to the other terms. In particular, what other things are being included in the contract? This could include things like the term, is it annual or over many years, renewal options that are automatic or by mutual agreement, and in some cases, does it include more than one GHG offset type. In particular, does the contract apply to the entire farm or just one aspect of the farm?

If the aggregation contract applies to the entire farm, then all offset opportunities have been assigned to the aggregator. This is much more of a commitment than contracting for a single type of GHG offset opportunity. For example, does the aggregation contract apply to just soils or does it also include the livestock. If it applies to both, then the farmer could find they are unable to take advantage of opportunities in livestock with another aggregator firm. Sometimes this can also appear as a “right of first refusal” on other GHG offset opportunities. When this is the case, the farmer has really granted an option for free to the aggregator. A “right of first refusal” can act to lock out, or reduce competition for your business. The farmer having signed this type of contract would have to obtain written confirmation from the original aggregator before proceeding with anyone else. This will add to costs and potentially expose the competing aggregator to losses of intellectual property. So, ultimately it’s only the farmer that pays for the option, not to mention having given up the right to freely choose who to deal with on potential future GHG offset opportunities.

GHG Policy Watch

Canada continues to remain un-engaged in the North American GHG policy debate. The only exception to this was a few comments by Federal Environment Minister Jim Prentice to the press last week that Canada has taken the position of likely following the USA when it comes to Canadian GHG policy. Citing potential trade actions and the need to harmonize with US GHG policy, Canada has effectively surrendered its independence in this policy area. So, we look forward to a form of cap-and-trade not unlike that proposed by the US House of Representatives and currently under review and forecasted to be done by year end. This proposed US legislation places absolute caps on GHG emissions with the details of how to allocate the emissions permits, assistance for hard hit sectors, and GHG offsets still up for discussion. Look for more details on this in future columns, since this is more relevant to the GHG offset policy discussion in Canada than what’s coming out of Ottawa these days.

Reference: Bruce Love, Preferred Carbon
Disclaimer: The views expressed in this article are those of the author only and are not intended to represent financial advice.

Markets

Fundamental Analysis

World Production in Million Metric Tonnes  

	Production			Ending Stocks			Ending Stocks
	2007-08	Apr-09	Change	2007-08	Apr-09	Change	5 Year Avg
Rapeseed	48.4	57.9	20%	3	6.3	103%	4.6
Barley	133.2	153.8	15%	18	30.1	66%	25.7
Wheat	610.6	682.0	12%	119	158.1	33%	138.6
Corn	792.3	786.4	-1%	128	143.3	12%	125.9
Soybeans	220.9	218.7	-1%	53	45.8	-14%	54

USDA Report updated April 9, 2009

Technical Indicators

I have set up these weekly updates to include market entry indicators to help you improve the timing of your grain marketing. Also, I added market trend indicators to give you a sense of the short and long term market trends.

Canola – November Futures
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Wheat – December Futures
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Barley – July Futures
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Canadian Dollar – July futures
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International Crop Weather News

United States: In the West, rain and snow showers are spreading across areas from the Pacific Northwest to the northern Rockies, while mild, dry weather favors fieldwork and crop development in California and the Southwest. On the Plains, a chilly rain is ending across east-central portions of the region. Meanwhile, the Red River of the North and several tributaries are again on the rise, following a mild weekend that melted much of the remaining snow. Farther south, producers across the southern half of the Plains continue to monitor the effects of early-April freezes on winter wheat. In the Corn Belt, rain is further delaying the onset of most spring fieldwork. Currently, some of the heaviest rain is falling across northern Illinois. In the South, torrential rain is returning to already soggy portions of Alabama, Georgia, and northern Florida, but unfavorably dry conditions persist across Florida’s peninsula.

Europe: Dry weather in central and northern Europe promotes small grain and sugar beet planting. Freezes in Poland and the Baltics keep winter grains and oilseeds mostly dormant. Heavy rain across southern Europe slows citrus harvesting and corn planting but provides supplemental moisture for irrigated winter wheat.

Former Soviet Union: In Ukraine and southern Russia, above-normal temperatures promote greening of winter grains, while mostly dry weather improves conditions for spring grain planting. In northern Russia, unseasonably mild weather causes significant melting of the deep snow cover.

Southeast Asia: Showers benefit oil palm across Malaysia and Indonesia but cause minor harvest delays. Showers throughout the Philippines benefit spring-sown rice and corn but slow fieldwork. Locally heavy showers in coffee areas of Vietnam spur early flowering.

East Asia: A freeze in the Shandong province of China causes localized burn back of vegetative winter wheat. Showers south of the Yangtze River benefit reproductive winter rapeseed as well as vegetative spring corn and early double-crop rice.

South Asia: Drier weather in northern portions of India and Pakistan favors wheat and rapeseed harvesting, although recent showers slow fieldwork. Heavy showers signal the arrival of the monsoon in northeastern India, providing moisture for rice. In southern India, harvesting of winter rice and groundnuts proceeds without delay under sunny skies.

Middle East: Locally heavy rain in southern Iran boosts irrigation supplies for heading winter grains. Showers, some heavy, in northwestern Iran provide beneficial topsoil moisture for rain-fed wheat. Showers in Turkey and Syria maintain favorable conditions for vegetative winter grains.

North Africa: Additional showers maintain ideal conditions for heading to filling wheat and barley.

Australia: Showers return to southern Queensland and northern New South Wales, temporarily interrupting cotton and sorghum harvesting.

South America: Locally heavy rain boosts moisture for immature soybeans in parts of central and northern Argentina. Unseasonable warmth and dryness persist in southern Brazil, promoting soybean harvesting but limiting moisture for second-crop (safrinha) corn. In contrast, rain in central Brazil benefits second crop corn but hampers soybean harvesting.

South Africa: Conditions remain overall favorable for corn and other maturing summer crops.

Canada: Seeding commences in mid-April in Southern regions and early May in Northern regions.