Agronomist Notes

Kia ora tatou (hello everyone) from beautiful New Zealand!

I arrived in Christchurch on Sunday to a warm 30oC welcome. This is my kind of January! Comfortably settled in my spacious rental, I tried hard to remember how to drive a car from the other side of the vehicle on the other side of the road with lunch in one hand and a road map in the other. It’s a good thing my Blackberry doesn’t work here or I’d be a menace. Bursting with confidence that I could handle round-a-bouts after my training with Uncle Roy in Australia last year, I entered the first loop. It spit me right back out in the direction of the airport I just left. I attempted Round No. 2 a humbled man and was set straight from then on.

I eventually made my way to another warm welcome from my hosts Craige and Roz Mackenzie and their children Jemma and Scott. They farm near Ashburton, about an hour outside of Christchurch. I wasn’t there long before we started into the first of the wheat harvest. No time for jet lag; it’s off to work on the biggest wheat harvest I’ve ever experienced and I’m talking about yield, not acres.

In this week’s newsletter we’ll look at the farming operation owned by my hosts Craige and Roz Mackenzie. Next, (after having some flight time to think of the big picture), I’ll discuss the three most valuable commodities of the future and the opportunities they hold for agriculture. We’ll also look at the bullish case for carbon values in Alberta and we’ll finish with market news. Have a great week.

Agronomy

Farming with the Mackenzies

Craige and Roz Mackenzie farm near Ashburton, NZ and crop 200 hectares (500 ac) of irrigated wheat, corn, carrot seed, red beet seed, barley, ryegrass, pak choi and hybrid radish. They are also partners in an 830 head dairy purchased three years ago, which is managed on a 220 hectare (550 ac) property. The landscape is fairly flat with clay based soils and plenty of rocks. The Southern Alps mountain range sits in the background to the north which makes for cooler nights and a great climate to grow crops.

The average irrigated farm size in the area is 200 hectares (500 ac) with dry land farms averaging 400 hectares (1,000 ac). The average rainfall in Ashburton is 900 mm or 35 inches per year with essentially a twelve month growing season. For instance, the wheat we harvested yesterday was planted last March. The carrots they plant require a fourteen month growing season which blows my mind considering our growing season is four months long at most. Think of how capitalized you’d have to be in order to wait eleven months for a return on your investment.

One of the biggest challenges in this area is the return on capital invested in land. Land values hover around $15,000 an acre. Average net returns for dry land feed wheat are roughly $650 per acre or $700 for milling wheat. If you work that out, it’s only a 4% return on capital and hence the reason the Mackenzie’s have diversified into crops like carrot seed which has the potential to net returns upwards of $2,000 to $4,000 per acre or 13% to 25% return. 

Next week I’ll share more about the Mackenzie’s operation and some great harvest photos. SL

Grain prices in New Zealand

Here is a quick and dirty look at grain prices in New Zealand. Prices are dollars per tonne.

Feed Wheat: $350 NZ, $226 CAN
Feed Barley: $350 NZ, $226 CAN
Corn: $450 NZ, $290 CAN
Silage Corn: $0.14 - $0.16 CAN per pound per dry matter standing
Straw 3 × 4 ft bale: $110 NZ, $70 CAN 

Two valuable commodities of the future as I see it

Having travelled to several key agricultural countries in the last twelve months I see several common themes that are financially relevant all of us. In terms of commodities, there are two in particular I feel will hold the most value in the future: water and carbon. Let’s digest this further.

Water, as we’re coming to realize, is not the renewable resource we thought it once was. Rains are not replenishing the lakes and streams as they once did and evaporation rates are greater than any other time in history. Add a rising global demand for food and water and we’ll be forced to produce more food with less water. It doesn’t matter whether you subscribe to the philosophy of climate change or global warming. Even if we’re in a simple 20 or 50-year dry cycle, it’s coupled with a time when the world’s population will double its demand for food and water. That creates a net short supply of water for a resource that is very price sensitive. The cost of irrigation water in Australia is a great example. During the drought over the last few years, water allocations have been significantly restricted and values have traded from a low of $80 per million litres to $2,200 per million litres. Bottom line: those in agriculture who hold rights to water will find themselves with one of the richest investments they’ve ever made.

The second most valuable commodity is carbon which may seem strange given the fact we really haven’t paid much attention to it until the last few years. We know that carbon is the building block of life and the more carbon we store in our soils the greater our yield potential. However, it’s the climate change policies and emerging carbon markets that will dictate the value of carbon, not its value to crop production. Today, many of the industrialized nations like the EU, Canada, Australia, New Zealand and the US either have or will soon have a carbon trade policy in place. Large final emitters who must purchase offset carbon credits to continue emitting CO2 will face a net shortage of quality credits. Once again, as with water, we’ll be in a net short position of quality carbon offsets in a market whose demand continues to climb with every passing carbon trading policy. Bottom line: agriculture holds the largest potential to supply the limited number of carbon offsets the world can generate.

The more I travel and see the challenges this world faces, the more I’m convinced that water and carbon hold the greatest opportunities to prosper in the future. Both involve agriculture which makes me even more enthusiastic about this fantastic business we choose to be a part of. SL    

The Bull Case for Alberta GHG Offset Values

January 27, 2009- Let’s start by examining the Green House Gas (GHG) offset price structure of the Alberta GHG compliance market today. A cap on carbon prices is created by the unlimited access of Large Final Emitters (LFEs) to the Climate Change and Emissions Management Fund or “Tech” fund at $15/tonne to meet their GHG compliance requirements. This cap is also supported by market values for Alberta offsets being generally below $15/tonne outside of Alberta. So if we view the value of Alberta origin GHG offsets as a discount to the tech fund, it should be very difficult for values to move over the $15/tonne price cap within Alberta. However, there are several factors that support carbon prices moving higher over time without linkages to other markets and these include:

• Increases in the Tech fund contribution values. The Act allows the Minister to set and adjust from time-to-time the price at which LFE’s can meet their compliance requirements through Tech fund contributions. The $15/tonne may become artificially low over time and some would argue that it is already too low. Increases in this value with a constant price spread to GHG offsets should increase offset prices.
• Reductions in access to the Tech fund over time. When the Act was created, Government representatives stated that they anticipated reducing access to the Tech fund over time. As access declines, even small changes, greater demand for GHG offsets is created.
• No shortfall penalties for offsets submitted for compliance. An LFE that submits GHG offsets for compliance purposes and undergoes an audit that results in a reduction in the claimed amount must simply make up the difference without penalty. The only risk for the LFE is did they take a large enough discount on the price to offset the reduction in tonnage. Analysis suggests that this discount may have been too great but that’s a future column.
• Carbon credits are bankable until 2014. This allows for significant opportunity to benefit from potential future price increases over the term of the Act. The acceptance risk of the offset for compliance purposes is significantly reduced if the offset type has already been accepted. A review of the first compliance period shows certain buyers retiring only a portion of the offset types purchased and banking the reminder.

Now let’s consider the additional markets for the Alberta origin carbon credits. These exist today, but they are based on voluntary actions and not compliance requirements. Values in the voluntary markets have generally remained well below the $15/tonne level. Without values above the $15/tonne level, the price cap in Alberta remains effective.

Now consider the creation of a cap-and-trade system on a national level. The Act specifies that if LFEs wish to use offset credits for compliance purposes they must originate from Alberta only. However, there is no such requirement on the sales of Alberta-based offsets. Therefore, as compliance markets become established in both Canada and the USA, potential exists for offset sales in excess of the $15/tonne price cap currently in place.

Factors both within and outside Alberta support GHG offset values in Alberta increasing significantly over time. Since markets are forward looking, even the announcement of a future restriction on the use of the Tech fund or a future increase in the price to access the Tech fund would result in immediate increases in the current value of GHG offsets given they are bankable for future use. Add to this the likelihood of additional markets being created as Federal Governments adopt cap-and-trade systems and prices seem more likely to increase than decrease over time.

Source: 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.

Market News

Updated USDA report January 12th, 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 Chart http://futures.tradingcharts.com/chart.php?cbase=CA&market=RS&cterm=39

Support: $423.73
Resistance 1: $434.03
Resistance 2: $444.33

Market Entry
The Bollinger Bands are indicating an oversold market. Recently the market has been extremely bullish, however currently the market has lost some of its bullishness due to the following: price is below the fast moving average.

Market Trend
The Relative Strength Index is somewhat overbought at 53.13. However, this by itself isn't a strong enough indication to signal a trade. Look for additional evidence before getting too bearish here.

The MACD is in bullish territory, but has not issued a sell signal here. The long term trend, based on a 45 bar moving average, is UP. The short term trend, based on a 9 bar moving average, is UP. MACD is in bullish territory. However, the recent downturn in the MacdMA may indicate a short term decline within the next few bars.

Feed Barley Chart http://futures.tradingcharts.com/chart.php?cbase=BA&market=AB&cterm=39

Support: $143.50
Resistance 1: $148.30
Resistance 2: $153.10

Market Entry
The Bollinger Bands are indicating an overbought market. The market is EXTREMELY BULLISH in the short term. Everything in this indicator is pointing to higher prices: the fast average is above the slow average; the fast average is on an upward slope from the previous bar; the slow average is on an upward slope from the previous bar; and price is above the fast average and the slow average.

Market Trend
The Relative Strength Index is somewhat oversold at 48.6. The MACD is in bullish territory, but has not issued a signal here. The long term trend, based on a 45 bar moving average, is DOWN. The short term trend, based on a 9 bar moving average, is UP. Momentum is indicating an oversold market. However the market may continue to become more oversold. Look for evidenced strength before interpreting any bullishness here.

Hard Red Spring Wheat http://futures.tradingcharts.com/chart.php?cbase=MW&market=MW&cterm=39

Support: $6.28-5
Resistance 1: $6.61-5 
Resistance 2: $6.94-5

Market Entry
The Bollinger Bands are indicating an oversold condition.

Market Trend
The Relative Strength Indicator is in neutral territory (RSI is at 52.87). Look for additional evidence before getting too bearish here.

The MACD is in bullish territory, but has not issued a buy signal here. The long term trend, based on a 45 bar moving average, is UP. The short term trend, based on a 9 bar moving average, is DOWN. The recent downturn in the MacdMA may indicate a short term decline within the next few bars.

Canadian Dollar http://futures.tradingcharts.com/chart.php?cbase=CD&market=CD&cterm=39

Support: $0.78
Resistance 1: $0.805
Resistance 2: $0.829

Market Entry
The Bollinger Bands are indicating an overbought market. Recently the market has been extremely bearish, however currently the market has lost some of its bearishness. It’s possible that we may see a market rally here. If so, the rally might turn out to be a good short selling opportunity.

Market Trend
The Relative Strength Index is somewhat oversold at 48.05. However, this by itself isn't a strong enough indication to signal a trade. Look for additional evidence here before getting too bullish here.

The MACD is in bearish territory, but has not issued a signal here. The long term trend, based on a 45 bar moving average, is DOWN. The short term trend, based on a 9 bar moving average, is DOWN. However, the recent upturn in the MacdMA may indicate a short term rally within the next few bars.

Glossary of Technical Terms: http://www2.barchart.com/education/learning.asp 

International Crop Weather News

United States: In the West, beneficial rain and snow showers are affecting areas from central and southern California to the central Rockies. On the Plains, sharply colder air, accompanied by light snow showers, is punching into northern and central portions of the region, with sub-zero lows from Montana to the Red River Valley. Meanwhile, warm, breezy conditions are maintaining severe stress on the southern Plains’ winter grains. In the Corn Belt, cold, breezy conditions are overspreading the upper Midwest in the wake of a cold front’s passage, but mild weather continues across southern and eastern areas. In the South, scattered frost was reported this morning and some freeze-protection measures were again required across central and interior southern Florida, but temperatures were higher than those observed on Thursday. Producers continue to monitor Florida’s citrus, sugarcane, strawberries, winter vegetables, ornamentals, and nursery crops for signs of damage.

Europe: Dry, seasonably cold weather over much of Europe maintains favorable overwintering conditions for dormant winter crops. Rain across England and northern France boosts moisture reserves for dormant winter grains.

Former Soviet Union: A warming trend overspreads Ukraine, Russia, and Belarus, improving overwintering conditions for winter grains.

Southeast Asia: In Indonesia, heavy rainfall continues to provide abundant soil moisture for rice in Java, while drier weather aids oil palm harvesting in Sumatra. In the Philippines, flooding rains in southeastern areas cause localized damage to corn, while mostly dry weather elsewhere eases excessive wetness.

South Asia: Showers over northern portions of India and Pakistan provide moisture for reproductive winter wheat. Dry weather elsewhere favors summer crop harvesting.

Middle East: Rain continues in Turkey’s winter grain areas, boosting soil moisture and irrigation reserves. Light to moderate snow in northwestern Iran affords winter wheat some protection again potential bitter cold.

Northeast Africa: Showers continue to hamper late winter grain planting in Morocco and Algeria. Locally heavy rain in Tunisia provides soil moisture for emerging winter grains but slows fieldwork.

Australia: In eastern Australia, very warm, mostly dry weather reduces moisture supplies for vegetative to reproductive cotton and sorghum.

South America: In southern Brazil, moderate to heavy rain benefits soybeans and corn stressed by earlier periods of dryness. Conditions remain generally favorable for soybeans in central Brazil. Scattered showers bring localized drought relief to central and northern Argentina, but dry pockets continue. However, above-normal temperatures maintain high moisture requirements of reproductive summer grains and oilseeds throughout the country.

South Africa: Warm, showery weather promotes the growth of corn and other summer crops, although more rain would be welcome in white corn areas of Free State and North West.