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Greetings
Adios sunshine, hello winter! We said good bye to Mexico last week and then spent five days in snowy southwestern Ontario. While there we visited a number of farms that produced tobacco, shitake mushrooms, corn, beans, poultry, dairy and shared in some wonderful down-home hospitality. Currently, we’re immersed in meetings with top gun bureaucrats in Washington, DC. ‘Interesting’ doesn’t begin to describe it!
In this week’s newsletter you’ll read about production costs in Mexico, tidbits on the price of pork, a purchasing strategy for cattle and even an explanation of the subprime mortgage crisis. I’m all over the map with topics! Have a great week.
Beyond Agronomy in the Press
Read how Acme producer Albert Neufeld and Beyond Agronomy are applying variable rate technology to address crop lodging, excess P levels, manure application, and compost amendments.
See the full article in Top Crop Manager. http://www.topcropmanager.com/index.php?option=com_content&task=view&id=1361
Read Steve’s opinion about manufacturer bundling.
See the full article in Top Crop Manager.
http://www.topcropmanager.com/content/view/1373/
Did you hear Steve speak at FarmTech 2008? Read about his talk on fine tuning management at the FarmTech 2008 conference website.
http://www.farmtechshownews.com/News/Fine-tuning-management-can-add-$50-ac.aspx
Agronomist Notes
Cost of Production for a Mexican Producer
Early last week we arrived in Mexico City, the home of 24 million people and just as many cars. Picture the worst rush hour traffic you’ve been in and multiply it by ten! Oddly enough, the traffic flows quite smoothly and rarely stops it’s symphony of controlled chaos. Unfortunately I didn’t get a chance to see the beauty of Mexico City. My memories are of the land fill we drove by for 10 minutes at 110 km/hr, the river of raw sewage we drove over, the heavy smog, dust and traffic. A redeeming highlight was a great chat with a real farmer about his costs of production.
A four hour drive through tremendous traffic brought us to a town called Toluco, where we met Pedro, a corn, wheat and potato grower. Pedro farms 150 acres of potatoes and 350 acres of maize and durum wheat. He’s considered a very large farmer relative to his neighbors who farm less than an acre each. The average farm size in the area is roughly half an acre, which is not enough to live on. One of the main reasons we were introduced to Pedro was because his adoption of zero tillage, a revolutionary change for this area. Pedro adopted zero tillage practices three years ago and has since reduced his labour costs by 60%, downsized his machinery from eight tractors to two and is proud to talk about it.
One of his biggest challenges is finding qualified operators to run equipment. Pedro must compete with the local factory with respect to wages, so he always offers a little more to attract workers. The second biggest challenge and, arguably, number one, is profitability. He sold his potatoes for $100 a tonne less than his breakeven this year. The third biggest challenge for Pedro is government intervention. If you remember the news of skyrocketing prices of tortillas in Mexico, well the government placed a price cap on corn prices forcing farmers to sell well below market price. In the meantime the processors and retailers hiked up their prices and continued to rake in heavy profits while the farmers took the hit!
Farmers like Pedro plant one crop per year starting in May, which is the beginning of the rainy season. They receive 30 inches of rain per year, with 85% falling during the growing season. I was told that it typically falls four inches at a time and runs off quickly. Their crop rotations include wheat, corn, black beans, canola, barley and oats. They harvest in late October and throughout November. This area has a cooler climate given the 5,000 foot elevation where temperatures of 7oC to 24oC are not uncommon, as well as frosts.
Here is a list of Pedro’s costs of production:
Land value: $6,500/acre
Land rent: $185/acre
Urea: $530/tonne
Phosphate: $935/tonne
Tractor operator: $15/day
Unskilled labour: $10/day
Diesel: $0.69/litre
Interest on loans: 13%
Wheat production costs: $300/acre, average yield 65 bu/ac
Corn production costs: $420/acre, average yield 120 bu/ac
Potato production costs: $4,200/acre, average yield 16 tonne/acre
As I see it, this area of Mexico has great potential in agriculture. It has plenty of natural resources like rainfall, soil and climate. If farmers were to adapt reduced tillage practices, newer equipment, proper fertility and GMO crops their production volume would grow by leaps and bounds. Future setbacks could likely stem from government intervention, as they’ve just experienced, or another inflationary collapse. Aside from that, if this land was located near my farm, I would be more than happy to purchase it. SL
A Day with USDA Officials
As I write this I am sitting at the Washington Plaza in downtown Washington, DC after seven hours of meetings with top USDA officials. My head is brimming full and craving to spill the information I learned today!
We heard talks from a specialist in US ag policy, the Chief Economist for the USDA Foreign Agricultural Service, the VP of International Trade for the American Meat Institute, the Chief Economist for the National Cattleman’s Beef Association. I’ll stop here for a moment to say that I intend to host a private client meeting in April with the later gentleman to discuss upcoming challenges and opportunities in grains and livestock markets. He’s as switched on as you can get and a beef producer to boot.
Other speakers included the Director of Policy for the US Wheat Producers, Special Doha Agricultural Envoy for the USDA, and the Chief Administrator of the USDA Foreign Agricultural Service (ie. the George Bush of the USDA). Did I mention my head is swimming? SL
Pork Prices in North America
The major driver for the huge supply of finished hogs and the subsequent devastating drop in North American lean hog prices was due to a new vaccine if you can believe it. Roughly 16 months ago, US pork producers were losing up to 30% of their 60 to 90 pound hogs from a disease they had no vaccine for. They operated for some time with significant death losses until a vaccine was brought into the market and deaths were dramatically reduced. This reduction in mortality meant that up to 30% more hogs were ready for slaughter causing a huge glut in supply last fall that had no market.
The Canadian pork producers have felt the sting of low prices and many have closed their doors with some loosing up to $25,000 per week. You can only bleed so long with those kinds of losses. The reason US producers didn’t spill red ink like Canada is because many of the US hog processors are vertically integrated with the producers. Processors own a large proportion of hogs on farm so they were able to hedge their production and costs out to six or eight months. Well, the time has come for US pork producers to begin hedging their production once again and they will have to go through the same pain we did with low commodity prices and high feed costs. The buffer right now is the low US dollar and their ability to flog huge amounts of cheap pork exports to China and Japan. There will be a light at the end of the tunnel when we get through the glut of pork in the US and Canada because the demand is still strong and the sow herd has declined dramatically. The best cure for low prices is what? Low prices. SL
Strategy for Canadian Cattle Producers
With the high price of feed grains, the low price of feeder cattle and strong Canadian dollar there is a potential to make money in cattle. Here’s a strategy: Purchase background cattle from the US this spring and ship them home to be grass fed. Ship them back to the US in the fall to be fed out for 100 days in the feedlot, which is 50 days shorter than normal. You can do this if you have an abundance of grass this summer or stock piled hay.
The second opportunity in the cattle market is to continue buying cows and heifers, which are at a discount to steers right now, and wait for this market to begin its upswing. The US and Canadian cow herds have shrunk considerably over the last few years yet the demand for meat from North America has grown. At some point the market will take notice that we don’t have the supply to meet the growing world meat demand and markets will begin their cyclical upswing. You could say the same about pork producers who tough it out right now. Those who are still producing finished hogs when the market gets through its excess supply situation will be rewarded for their diligence. SL
Explanation of Subprime Mortgage Crisis
I heard an analogy like this today and I thought it made sense. Picture this: you have three separate pens of purebred cattle on three sides of your property. One pen contains Red Angus, another holds Texas Longhorns and the last holds Belgian Blues. All of a sudden a tornado destroys all the fences and all the bulls and cows are mixed together. Now during that process, each eager bull has the opportunity to cover whatever breed of cow he likes leaving you with no way of identifying what purebred cow is bred to what bull. The end result is three pens of purebred cattle whose offspring are unidentifiable. That is exactly what happened in the subprime mortgage industry.
There were three risk levels in the mortgage industry ranging from low risk to high risk mortgages. The fences “exploded” and high risk mortgages were grouped with low risk mortgages and sold off as a unit on the stock market leaving nothing but an unquantifiable, mixed-breed asset that very few banks were willing to take ownership of once the housing market began to slide. Would you buy a pure bred Angus cow for top dollar knowing that it may throw a Longhorn cross calf? Nobody would and no bank would either.
The good news or bad news, depending on where you’re standing, is the sub-prime mortgage crisis is now at the eye of the storm and passing quickly so I’m told. I’ve seen data that shows the housing crisis may be over within the next three to four months. If that happens, Index Funds that have been pouring money into the commodity markets will exit and move back into the stock markets with the renewed confidence in the expected returns. The drop in commodity prices will be violent as billions of dollars rush out and move to stock markets that are now undervalued after many months of decline. What do we do? Purchase stocks and forget trying to hedge in this volatile market. If we hedge and markets continue to climb at unprecedented rates, we could be faced with margin calls that would force us out and sustain heavy losses. SL
Markets
Never Mind Farming More Acres Just Buy Monsanto Shares
The one major recommendation we heard today from Gregg Doud, Chief Economist for the American Cattleman’s Beef Association, is to purchase Monsanto shares. The lineup of high yield, drought tolerant and stacked gene varieties in the pipeline today is staggering and holds promise around the world. The GM market is set to explode globally as the acceptance of GM varieties gain momentum. Monsanto is in an excellent position to capitalize in the huge growth market for GM crops. Monsanto has added to its genetics portfolio by simply purchasing companies with strong plant genetic pools. Those of you who think that Monsanto will end up controlling the genetics around the world need not worry as over 100 independent, non-private gene banks like the one we visited at CIMMYT in Mexico still exist and will happily supply genetics to the world. The decline in the stock market over the last few weeks may be an opportunity to buy. SL
March 2008 La Nina Update
An area of warm sea surface temperature has formed off the Peru coast. Watch this to possibly kill La Nina. By March 3rd the water north of Australia was cooling and west of Peru was warming. These are two signs of a La Nina about to fade and with it the risk of serious Midwest drought diminishes somewhat.
Full story: http://www.extension.iastate.edu/CropNews/2008/03062008SET.htm
Be Sure to Have All Your Fertilizer Secured This Spring
Fertilizer prices are currently at all-time highs for all fertilizer materials, largely due to increased global wealth and demand. World fertilizer demand from 2001 to 2006 has grown 14%, which represents the size of a whole new US fertilizer market. China, India and Brazil are the areas where fertilizer demand is increasing the most. As those economies develop, their citizens are able to purchase more than rice- they’re able to purchase more meats, fruits and vegetables, which is increasing the demand for fertilizers to grow those foods.
Full story: http://enews.penton.com/enews/cornandsoybeandigest/corn_edigest/2008_03_17_march_17_2008/display
Argentina Increases Soybean Export Taxes
Farmers in Argentina, the world's largest exporter of soybean oil and meal, protested increased export taxes for a fifth day, refusing to provide produce and livestock to wholesalers and commodities markets. Levies of more than 44% have been added to exports of soybean oil and meal. This is positive news for world oilseed prices because Argentina is the world's third-largest soybean producer, behind the US and Brazil and second-largest corn exporter behind the US. Argentina is trying to control inflationary food costs by discouraging exports.
Full story: http://www.bloomberg.com/apps/news?pid=20601086&sid=ai5PkrPMGd7k&refer=latin_america
Saudi’s Increase Import Barley Subsidy
The Saudi government doubled the purchase subsidy on barley recently. Prior to this Saudi consumers had been using wheat flour and other grains as feed barley substitutes. The lift in subsidy should help restore Saudi interest in feed barley imports. Canada recently sold some barley to Saudi – the first significant import business in a few months. Notwithstanding export business, barley should also receive solid domestic buying support as feeders start to replace expensive wheat stocks with cheaper grains.
Source: Profarmer Australia
