Hursh Consulting & Communications: Kevin Hursh on Agriculture

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Hursh on Agriculture

November 30, 2006

How much do you think Mayo Schmidt makes?
The Notice of Annual Meeting has been sent to Saskatchewan Wheat Pool shareholders. The information on Executive Compensation makes interesting reading. Pool President and CEO Mayo Schmidt has a salary of $800,000 this year. The salary has stayed the same for the past three years, but other elements of his compensation have not. On top of the salary, Mayo Schmidt is getting a bonus of $560,000, which is actually down a little bit from last year. In the category of Other Annual Compensation, Schmidt is down to $37,000, only one-tenth of the amount in 2005. This is a tax equalization payment between Saskatchewan and California – a benefit that was discontinued in June. However, don’t feel too sorry for him. This year, for the first time, he received Restricted Share Units and Performance Share Units valued at more than $1.4 million. On top of that, before its restructuring Saskatchewan Wheat Pool had a long-term incentive plan based on achieving targets against the business plan. This category adds another $458,000 to overall compensation – double the amount paid last year. When you add it all up, Mayo Schmidt’s total compensation for being the Pool’s President and CEO – over $3.3 million. Last year, his compensation was a paltry $2 million. Who says there’s no money in the grain business? I’m Kevin Hursh.

November 29, 2006

Flax acreage likely to drop, canola likely to increase
Speculation is already rampant on the seeded acreage shifts that may occur next spring. With the price increase on canola and the strong futures prices, it looks like canola acreage could be up sharply. On a couple of crops, big acreage drops seem likely. Flax is a crop where prices have been flat. Prices have generally remained below $6 a bushel. Market analysts warned that with the flax acres being seeded last spring in North Dakota and the acres in Western Canada that the flax market would be oversupplied. The analysts were right. Lentils are another crop where prices haven’t kept pace. Green lentil prices are certainly better than last year, but they’re still low by historical standards. Red lentils aren’t very exciting either. Without some improved price signals, producers are likely to back off on flax and lentils next spring in favour of other cropping options. As the dominant world exporter, the Canadian acreage of flax and green lentils is a big factor in overall prices. If our acreage plummets, there could be significant price improvement. Some producers may use this logic to stick with flax and lentils. Others are looking for ways to lock in some of the good prices already available for new crop delivery on commodities like canola, mustard and oats. I’m Kevin Hursh.

November 27, 2006

Feeder cattle prices show improvement
The long slide in feeder cattle prices came to a halt last week. In her Cattle Market Update, beef economist Sandy Russell of Sask Ag and Food reports that price averages were higher on all classes of feeder cattle last week. The biggest price increases came on 400 to 600 pound steers, which were up $8 to $9 a hundredweight. Light heifers were also up, but only by $2 to $4 per hundredweight. Previous to last week, feeder cattle prices had declined for about two months, dramatically cutting the profitability of cow-calf producers. Sandy Russell says one of the reasons for the reversal is the improvement in fed cattle prices. In Saskatchewan last week, fed steers were up an average of $2.50, with heifers up a dollar. In Alberta, fed steers averaged $3.50 higher with heifers up by more than $3. Another factor helping feeder prices is year-end tax dollars being invested in the marketplace. Sandy Russell says bred cows and heifers continue to trade for a wide range of prices. With a significant supply of bred cows and heifers on the market, those prices are expected to continue experiencing pressure. I’m Kevin Hursh.

November 26, 2006

Biggest price improvement on lowest grades
When you compare the wheat, durum and barley prices expected for this crop year with last crop year’s prices, the improvement is much greater on the lower quality grades and classes. On No. 1 CWRS wheat with 14.5 per cent protein, the price last crop year if you had any was about $4.30 a bushel. The price in this crop year is expected to be $4.47 – not a large difference. On wheat with 12.5 per cent protein, last year was $3.59 and this year is expected to be $4.25. The difference is even greater on lower grades. A straight No. 3 last year was $2.66. This year, the expected price is $3.85 – an improvement of more than a dollar a bushel. The same trend holds on durum. There’s not much difference on No. 1 durum with very high protein. On No. 1 durum with 12.5 per cent protein, the average Saskatchewan price last crop year will total $3.83 a bushel versus $4.25 this year. On No. 4 and 5 durum, the price difference is almost a dollar a bushel. The top grade of two-row malting barley has a Pool Return Outlook of $3.09 a bushel for the current crop year. In many areas, that’s not much better than the domestic price of feed barley. It’s a year when quality isn’t paying the normal premiums. I’m Kevin Hursh.

November 23, 2006

Outstanding Young Farmers in Saskatoon
The national Outstanding Young Farmers program rotates across the country. This year it’s Saskatchewan’s turn. OYF honourees and alumni from across the country will be in Saskatoon next week. On Friday, December 1, the OYF program is open to the public. Starting at 9:00 am, there will be a public forum on Future Income Streams for Farmers. Al Scholz of Saskatchewan Agivision will moderate the forum. In the afternoon, the Outstanding Young Farmers from the seven regions across the country will each give a PowerPoint presentation and there will be some time for questions. These are enthusiastic and innovative farm couples from across Canada. I had the opportunity to attend last year’s event in Halifax and it was thoroughly engaging. It all starts at 9:00 am next Friday, December 1 at the Sheraton Cavalier in Saskatoon. There’s no charge to attend. However, if you want lunch, it’s $20 and you have to reserve in advance. Call Saskatchewan Agrivision at 306-384-4491 if you want lunch. For those unable to attend, the public forum and the OYF presentations will be available as a webcast by the Canadian Farm Business Management Council. Just log onto www.farmcentre.com. I’m Kevin Hursh.

Promoting careers in agriculture
The University of Saskatchewan’s College of Agriculture has changed its name. It’s now known as the College of Agriculture & Bioresources. More significantly, it recent years it has changed its approach to promotion and there are signs that it will reverse the tide on declining enrollments. At events such as Canadian Western Agribition, Olds College and Lakeland College from Alberta are in attendance promoting their ag programs. Now, you’ll also see the College of Agriculture with prominent booth space. Jon Treloar is the full time Community Liason Coordinator for the College. In addition to a presence at trade shows, Jon speaks at scores of high schools across the province to profile the multitude of careers in the agriculture sector. It’s an industry often overlooked by students and educators who think agriculture means only primary production. Starting next spring, grade 6 to 12 science teachers will be invited to 3-day research intensive workshops housed at the College of Agriculture & Bioresources. Many science teachers are unaware of what the college has to offer and therefore fail to recommend it to their students. At one time, the College of Agriculture was so prominent in the province that it didn’t need to worry about promotion. Those days are long gone. The college has to compete for students and it has to counter the misconceptions about agricultural science. I’m Kevin Hursh.

November 21, 2006

Two year wheat contracts with locked in prices
Terra Grain Fuels is using Agribition as a venue to launch a wheat contracting program with locked in prices. Terra Grain Fuels needs to ensure a wheat supply for its big new ethanol plant under construction at Belle Plaine, just east of Moose Jaw. The facility will have a capacity of 150 million litres of ethanol a year and it will require 15 million bushels of wheat per year. Company chairman Gary Drummond hopes to have the plant in operation by the end of 2007. For producers contracting their wheat for one year, the price is set at $3.55 a bushel. For those locking in for two years, the contract price improves to $3.68. Terra Grain officials point to the yield advantage that CPS varieties should have over the traditional bread making wheat that dominates production. As well, quality is much less likely to be an issue for ethanol production. Producers in reasonable proximity to the Belle Plaine plant will have to decide whether or not the fixed prices are a good deal. Some are being attracted by the cash advance being provided. Growers who sign up are eligible for an interest free cash advance of $30 per acre for a one year contract and $75 an acre for a two year deal. If you want to have a look at the contact and ask questions, the Terra Grain Fuels booth is located in the Credit Union EventPlex at Canadian Western Agribition. I’m Kevin Hursh.

Be a low cost cow-calf producer
As you walk through the barns at Canadian Western Agribition, it looks like business as usual. Purebred cattle producers are busy washing, trimming and blow drying their show animals. However, this is not a good fall for cow-calf producers who are the basis on the beef industry. Feeder cattle prices have been dropping steadily. Just last week, average prices across the province ranged from $2 per cwt lower on heavy feeders to as much as $9 lower on light steer calves. Whereas last fall was a profitable time, this year returns are meager or non-existent. As barley prices have risen, feedlots have bid less for calves. The U.S. border remains closed to animals over 30 months of age, so the price of cull cows remains artificially depressed and that also hurts profitability. Whereas the beef industry has long been growing in Saskatchewan, there now seems to be more producers than usual getting out. Some producers delayed herd liquidation plans during BSE, but now they’re getting to the age where they want to sell out. Sandy Russell, beef economist with Saskatchewan Agriculture reports that a large number of bred cows have been on offer across the province with prices under pressure. Cost of production analysis conducted by the Western Beef Development Centre shows a wide range from one producer to another. In times like this, it’s important to be a low cost producer. I’m Kevin Hursh.

November 19, 2006

Biofuels at Agribition
Over the past five years at Canadian Western Agribition, there have been numerous presentations and trade show displays dealing with ethanol and biodiesel. The arrival of biofuels always seemed somewhat remote and theoretical. This year is different. As Agribition opens this year in Regina, a lot of the strength in world grain and oilseed prices is coming from the demand for biofuels in the U.S. and Europe. Meanwhile, those higher grain prices are having a big effect on livestock feeding costs. Here in Western Canada, new ethanol plants are coming on stream with others under construction. Biodiesel facilities are also proposed. Everyone is waiting for the federal government to make its long promised announcement of a renewable fuels policy. Biofuels are providing new opportunities while bringing about major changes in agriculture. And this is just the start of the potential wave. Biofuels will be a major undercurrent at this year’s Agribition. No one knows how it will all play out or exactly what the ramifications will be, but biofuels are no longer just a hopeful theory. I’m Kevin Hursh.

November 16, 2006

Honour the wishes of the majority
The federal government is promising a barley marketing plebiscite early in the New Year. Agriculture minister Chuck Strahl says he has no immediate plans for a vote on wheat. In fact, he is offering assurances that wheat will remain under the Canadian Wheat Board’s single desk for the 2007-08 crop year. You have to think that at some point there would also be a vote on wheat. Some of the supporters of marketing choice say that plebiscite results don’t really matter. They argue that even if a majority of producers want single desk marketing, it isn’t right to force that system on farmers who are opposed. They say it’s trampling on individual rights and freedoms. While that’s a powerful argument, there are many examples in our society where individual choice is curtailed. If you take some jobs, you have to join the union. You aren’t given a choice. You can’t opt out of the Canada Pension Plan. And you can’t be a dairy or poultry farmer in this country without buying quota. Within the Canadian Wheat Board system, there are more marketing choices than ever before. It isn’t complete marketing freedom, but there’s more ability to market outside of the pool accounts. If a majority of producers want an open market for barley and/or wheat, so be it. However, if a majority wants to retain the single desk, the government should also honour that point of view. I’m Kevin Hursh.

November 15, 2006

Biodiesel production planned for Alberta
Yesterday at a meeting in Red Deer, I heard a presentation by Ian Thomson, the president of Canadian Bioenergy Corporation. This company has led the development of the biodiesel market in Western Canada by supplying biodiesel to public and private fleets across Alberta and B.C. While there are a number of ethanol plants being built and many more being proposed for Western Canada, Canadian Bioenergy Corporation is working on a plan for the first large scale biodiesel refinery in Western Canada. The company has a purchase agreement for land adjacent to Bunge Canada’s oilseed crushing and refining operations near Fort Saskatchewan, Alberta. The plan is for annual production of 114 million litres of canola-derived biodiesel. The U.S. provides a subsidy of about a dollar a gallon for biodiesel production. The Canadian canola industry has been calling for comparable support from our federal government. A federal policy announcement on renewable fuels is expected soon. It’s interesting to note that the province of Alberta has announced its own support program for biodiesel. Ian Thompson says the Alberta subsidy goes about half way to leveling the playing field with the U.S. Due to the support, it’s a lot more attractive to produce biodiesel in Alberta than it is in Saskatchewan. I’m Kevin Hursh.

Bafflegab from Ag Ministers meeting
Federal and provincial agriculture ministers met yesterday in Calgary. Much of the meeting dealt with Business Risk Management programs, in others words, farm safety nets. I’ve read and re-read the joint communiqué released at the conclusion of the ag ministers meeting. I listened in on the closing news conference and even asked some questions. After all that, I’m not sure that I learned a darn thing that was new. The communiqué says, “Vast improvements have been built into what is becoming a new margin-based income stabilization program.” In others words, the retroactive changes in the CAIS program are pretty much what the program is going to look like going forward. The ag ministers further say that “agreement has been reached on a separate disaster relief framework.” That framework must be pretty broad, because there were certainly no details provided on how this disaster relief program might work. As we’ve heard in the past, there was also reference to “options for considering the extension of coverage under production insurance to livestock and additional horticulture crops.” Again, no details. But take heart. A big new consultation is being launched for agriculture policies to take effect when the current Ag Policy Framework expires in 2008. All in all, there was a tremendous amount of bafflegab and very little that was tangible. I’m Kevin Hursh.

November 13, 2006

Ag ministers discuss farm safety nets
Federal and provincial agriculture ministers are meeting today in Calgary. One of the main topics on the agenda is farm safety nets. Provinces like Saskatchewan are going to plead poverty on cost sharing more lucrative programs. Some other provinces are going to want more autonomy to develop their own companion programs. Meanwhile, the feds can’t seem to decide whether CAIS is being replaced or revised. While it may end up with a different name, they say it will still be a margin-based program. The Canadian Federation of Agriculture has been lobbying for a NISA-type program as part of farm safety net programming, but there’s no indication that the politicians and bureaucrats have listened to that advice. The feds have promised a separate disaster assistance program, but there have been no details on how this might work. There seems to be far more to work out than what the federal and provincial agriculture ministers are likely to accomplish in a short meeting. In fact, meetings like this can sometimes cause setbacks in new program development. The ag ministers have scheduled a news conference for late this afternoon. Hopefully, that will shed some light on the future of the country’s farm safety net programming. I’m Kevin Hursh.

November 12, 2006

Interest rates and the value of the dollar could drop
On Friday, I had the pleasure of listening to well known financial analyst Jerry White speak to a meeting of farmers in Saskatoon. White made a number of predictions – some of which would be good news for agriculture and some that would not be good. On the negative side, White predicts that with the Democrats gaining more control of the U.S. political system, border access for agricultural products is likely to become more difficult. On the positive side, White has many financial predictions that would be good news. He predicts that with the large federal surplus, income tax rates will be reduced. He also expects the feds to cut the GST by one percentage point. Jerry White notes the economy of Central Canada is hurting, while the economy in Western Canada continues to grow. Due to the near recession in Central Canada, he says the value of the Canadian dollar needs to come down about 5 cents. That would help the value of exports, including agricultural exports. White also expects up to a one per cent decrease in interest rates. Again this would be good news for agriculture, since farm debt has increased rapidly in recent years. I’m Kevin Hursh.

November 9, 2006

CITI payments
Money is gradually flowing from the CAIS Inventory Transition Initiative. Starting with the 2003 claim year, CAIS is being recalculated using beginning and ending inventory valuations. Officials with the CAIS program say that in provinces like Saskatchewan where the program is federally administered, cheques began going out in the mail on September 27. Approximately 3,000 cheques per week have been going out since that time. That sounds like a lot of cheques, but spread over six provinces and one territory, a total of 18 to 20,000 cheques is still a small percentage of total CAIS applications. Each year is being done separately, so once 2003 is recalculated, they’ll start on 2004 and then 2005. So far, I’ve only talked to one producer who has received his CAIS recalculation. There was a decline in the value of his market cattle inventory for 2003, but he only received a very small payment because the value of his wheat and durum inventory increased. While some producers are likely to be disappointed, there should be others who receive a pleasant surprise. At the present pace, it’s going to be quite a while until all the CAIS applications for each of the years is recalculated. I’m Kevin Hursh.

November 8, 2006

Outside investors in Saskatchewan farmland
Saskatchewan’s farmland ownership laws changed three years ago. Canadians from outside of the province can now own farmland and those investors are gradually coming into the market. Some individual Alberta investors have purchased Saskatchewan farmland. The land is typically rented out and some of the deals are for cash rental rates equal to 5 or 6 per cent of the purchase price. While this isn’t a big return after the owner pays the property taxes, investors are betting that Saskatchewan farmland values are going to increase. A firm based in Regina called Agriculture Development Corporation or ADC (http://www.farmlandinvestor.ca/) is raising money from investors to purchase Saskatchewan farmland and then rent out the land. Most of the contracts are for a cash rent, but others are crop share. Palliser Farmland Management Corp., a division of ADC manages the leases on behalf of investment owners. ADC does its homework on what’s an appropriate purchase price and they aren’t interested unless someone wants to rent the land. Their offer to purchase is typically conditional on finding a renter. While a small player in the overall land market, ADC is a sign of changing attitudes. When outside investors are interested in Saskatchewan farmland, all those who own some dirt suddenly feel a bit better. I’m Kevin Hursh.

November 7, 2006

Saskatchewan Wheat Pool wants a merger with Agricore United
Saskatchewan Wheat Pool has made an offer to Agricore United that would see the two companies merge. It’s primarily a share swap rather than a cash deal and how it will all turn out is anyone’s guess. The announcement from Pool CEO Mayo Schmidt came late yesterday afternoon. An early evening news release from Agricore United said the board would be meeting to consider the unsolicited proposal and would respond in due course. Agricore is urging its security holders not to tender their securities pending a recommendation from the board. In his news conference, Mayo Schmidt talked about the business advantages of the merger. The new company, whatever it’s name, would have a dominant position in the Canadian grain handling and farm supply business. In fact, one would expect the Competition Bureau to require some conditions and perhaps divestitures in order for the deal to be approved. Mayo Schmidt also made several references to how a merged company would provide a stronger voice for Western Canadian farmers. On this, Schmidt is off base. Saskatchewan Wheat Pool and Agricore United are not significant farm policy organizations. That won’t change if and when they merge into an even bigger corporate entity. I’m Kevin Hursh.

November 6, 2006

The biggest bull market for grain since the 70s
A recent article in the Wall Street Journal has interesting statistics on how much American corn is now being used to produce ethanol. The U.S. has 106 ethanol plants in operation, with 7 of those undergoing expansion and 48 new plants under construction. The USDA is predicting that the ethanol industry will consume 2.15 billion bushels of this year’s U.S. corn crop. That’s 20 per cent of the total crop. Corn prices are rising – up more than 50 per cent in the past couple months. In many futures months, U.S. corn prices are now over $3.50 a bushel. The Wall Street Journal is calling it the biggest bull market for grain since the 1970s. With ethanol supplies going up and with gasoline prices falling, ethanol prices have declined after hitting record highs this summer. Still the industry is so profitable in the U.S., due in no small part to tax incentives that ethanol expansion continues. For the livestock feeding industry and for food manufacturers, the increase in corn prices is cutting returns. However, U.S. grain farmers are actually relying mainly on the marketplace rather than government subsidies. Ethanol has changed the grain industry and the ramifications are wide ranging. I’m Kevin Hursh.

November 5, 2006

High barley prices pressure feeder cattle
Fed steer prices are currently very similar to the levels of a year ago. However, feeder cattle prices are significantly lower than last year. Sandy Russell, a beef economist with Saskatchewan Agriculture and Food has graphed the weekly prices for 550-pound feeder steers for this year versus last year. 2006 prices had been running well above 2005 levels until about six weeks ago when the two lines crossed. Before the decline, feeder steer prices were in the $130 to $140 per cwt range. In recent weeks the price has slipped to just over $120. Prices are now $15 to $18 per cwt below the levels of a year ago. The drop in feeder cattle prices corresponds to the run up in feed barley values. Most observers have been surprised by the strength in the barley market. The price basis Lethbridge is now around $3.40 a bushel. That’s an increase of 70 to 80 cents a bushel over the past six weeks. With feed costs substantially higher, feedlots have backed off on what they’re willing to pay for feeders. I’m Kevin Hursh.

November 2, 2006

Saskatchewan needs a pork processor
Hog slaughter capacity on the prairies has quickly moved from a situation of impending surplus to one of impending shortage. In addition to Maple Leaf Foods canceling the new facility for Saskatoon and closing Mitchell’s Gourmet Foods, Maple Leaf is also closing a significant plant in Winnipeg and closing or selling a smaller facility in Lethbridge. Problems at Olymel, based in Quebec are also having big ramifications in the West. Olymel is bleeding so much red ink that it has hired former Quebec Premier Lucien Bouchard to try to figure a way back to profitability. Thus there’s no longer an expectation for increased capacity at Olymel in Red Deer. Olymel also had plans to partner with Hytek of Manitoba and Big Sky Farms of Saskatchewan, the number two and number three hog producers in the country, to build OlyWest, a big new plant in Winnipeg. That plant has run into public resistance and it still going through the approval process. At best, it would be up and running in 2009. However, with the financial problems at Olymel, there’s a good chance OlyWest will never go ahead. The time is ripe for producers and / or another meat packing company to set up in Saskatchewan. The future of the Saskatchewan hog industry depends on it. I’m Kevin Hursh.

November 1, 2006

Importance of oats doesn't match federal breeding commitment
Canada is the world’s largest exporter of oats – nearly two million tonnes a year. We’re expected to account for 70 to 80 per cent of world oat exports in this crop year. The biggest oat customer in the world is the U.S. Most of the oats exported from Western Canada go to fill American human food requirements. Oats have numerous health benefits. The value of our exports is over $200 million a year. Oat prices are currently good and more acres are likely to be seeded to oats in Saskatchewan and Manitoba next year. While oats are an important crop for a lot of growers, you wouldn’t know it by the commitment to oat breeding. A recent bulletin on oats from Agriculture and Agri-Food Canada says that over the last four years, the complement of oat-specific breeders has been reduced from four federal positions to just two. The only federal oat breeding initiative left in Western Canada is in Winnipeg and there’s just one breeder. It’s a good thing producers are starting to invest. The Saskatchewan Oat Development Commission was established on August first. The producer-run organization is collecting a 50 cent per tonne refundable check-off and some of the money will go to support research on improved varieties. I’m Kevin Hursh.

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