Hursh Consulting & Communications: Kevin Hursh on Agriculture

566 Adilman Drive, Saskatoon, SK Canada, S7K 7H5
Tel: (306) 933-0138 Fax: (306) 249-4869 kevin@hursh.ca

Hursh on Agriculture

October 31, 2007

Watch the American ethanol battle
A political battle is being waged in the U.S. that will have huge ramifications for agriculture on this side of the border. It’s the battle of ethanol supporters versus the livestock industry and the oil industry. David Kruse, the president of CommStock Investments Inc. and author of the CommStock Report has produced an insightful commentary on the issue. Kruse asserts that for most of the past two decades federal subsidies have kept American corn and soybean farmers in business while assuring a cheap and abundant grain supply for food and feed. The biofuel industry has changed that. Producers are now getting most of their money from the marketplace and grain isn’t so cheap anymore. That’s squeezing the livestock industry and it’s displacing petroleum. Kruse says big oil has joined forces with the livestock industry to lobby politicians in Washington and undermine the political support for biofuels. He also accuses them of creating a firestorm of negative media spin against ethanol. Of course, Kruse wants to see policies that further the distribution and consumption of ethanol saying these are more important than the farm bill to the future of the U.S. farm economy. How the Americans proceed will be a key factor for world grain prices in the years ahead. I’m Kevin Hursh.

October 30, 2007

R-CALF, BSE and E. coli
The anti-trade American cattle producers group known as R-CALF is once again using the legal system in an attempt to block Canadian beef. This time, R-CALF has teamed up with 10 other plaintiffs in an attempt to stop Canadian animals over 30 months of age. The over 30-month rule is scheduled to take effect on November 19. As usual R-CALF is claiming that Canadian cattle have an increased risk of BSE and will put American consumers at risk. Recent developments show there are many health risks that are much more tangible than BSE. The Canadian Food Inspection Agency is investigating 45 cases of the deadly strain of E. coli known as O157:H7 that occurred this summer across five provinces. As a result of these cases, 11 people were hospitalized and one elderly individual died. In the U.S., 40 illnesses are under investigation in eight states with 21 known hospitalizations. The U.S. outbreak of E. coli O157:H7 infections has been linked to Topps Meat Company. In both the U.S. and Canada, the source of the problem beef has been traced to Ranchers Beef Ltd, located at Balzac, Alberta. Ranchers Beef ceased operations on August 15. Watch for R-CALF to latch onto the E. coli outbreak as it argues against Canadian beef. I’m Kevin Hursh.

October 29, 2007

Putting marketing choice into perspective
I talked to a producer recently who is upset at the price of durum wheat through the Canadian Wheat Board. The latest Pool Return Outlook puts the price of durum for Saskatchewan farmers at about $11.50 a bushel. This producer said the price of durum has been $17 to $18 a bushel in the U.S. for the past month. He said this price difference was going to cost him hundreds of thousands of dollars. “How can anybody say the CWB is doing a good job?” he asked. It’s certainly true that American producers who held onto their durum are now enjoying extraordinary prices. However, most U.S. farmers sold their durum for under $7 a bushel and there’s very little durum left to market at these amazingly high values. The Canadian Wheat Board’s asking price at Thunder Bay is currently over $20 a bushel, but most Canadian sales have also been made at much lower values. That’s why the Pool Return Outlook is only $11.50. Still, Canadian durum growers will get a significantly higher price than most American durum growers this year. It doesn’t always work out that way and a lot of Canadian producers want the ability to do their own marketing and have their own successes and failures. I accept that point of view, but it isn’t very honest to look at the highest prices ever seen for durum and to assume that as a producer you’d have held your entire production to sell at the peak. I’m Kevin Hursh.

October 26, 2007

Durum planting seed will be expensive
With another sizable increase in the Pool Return Outlook for durum, the expected price for Saskatchewan growers is now $11.24 a bushel for No.1 grade with 12.5 per cent protein. There isn’t a big discount for lower grades. No. 4 durum is $10.42 a bushel. You have to fall all the way to a No. 5 before there’s a serious discount. Looking back through the years, the 1995-96 crop year had strong durum prices - $6.67 a bushel for a No. 1. The 2001-02 crop year also had good prices – just under $6. The 2005-06 crop year saw terrible durum prices – only $3.79 a bushel for the top grade. The price for last crop year is expected to hit only $4.65 a bushel. Going from $4.65 to $11.24 is an amazing move. Producers who held 2006 durum to sell in this crop year made a lot of money. Yesterday I talked with a certified seed grower who was scratching his head wondering where the price for durum seed might end up. You have to think that these record prices are going to attract a lot more acres next year. I’m Kevin Hursh.

October 25, 2007

Waiting lists for new farm equipment
If you want to buy a new four-wheel drive tractor, a combine or a high clearance sprayer, you better get your name on a list. With the strong returns in the grain industry across North America, farmers are snapping up new equipment faster than manufacturing plants aren’t turning it out. John Schmeiser, executive vice president of the Canada West Equipment Dealers Association says there isn’t a lot of inventory sitting on dealers’ lots. Instead, producers have to order new equipment and wait for it to roll off the assembly line. While availability has become an issue, prices for imported machinery have declined due to the rapid rise in the value of the Canadian dollar. Unfortunately, this is a double-edged sword because the moderation in new equipment prices is putting pressure on the value of used machinery, making a producer’s trade-in worth less. As well, Schmeiser notes that Canadian farm equipment manufacturers of products like air drills are now having more difficulty competing in the U.S. market and are devoting more effort to domestic sales and sales in other countries. Schmeiser says the top issue for farm equipment dealers is now labour. Dealerships cannot get enough qualified technicians to do servicing and repairs. I’m Kevin Hursh.

October 24, 2007

Crop insurance improvement is a hollow promise
One of the few agricultural promises in the provincial election campaign has been a commitment by the Sask Party regarding crop insurance. “A Saskatchewan Party government will maintain current levels of funding for crop insurance, while conducting an immediate review of the program to determine how to increase coverage and reduce premiums for producers,” says the Sask Party election platform. Yesterday, at an agricultural forum sponsored by APAS in Saskatoon, Bob Bjornerud of the Sask Party provided a crop insurance example from a farmer with land in Saskatchewan and neighbouring Manitoba. The land on the Manitoba side has significantly higher crop insurance coverage with significantly lower premiums. While that makes it appear that the Saskatchewan program is inferior, you have to consider that on average Manitoba has higher yields. They’re less drought prone and they get fewer hailstorms. Examining the Saskatchewan program to develop improvements sounds like a great idea, but I’ll bet they’ll find Saskatchewan Crop Insurance is actuarially sound just like the Manitoba plan. Yes, it would be great to have an improved crop insurance program in this province, but there won’t be many improvements while maintaining current levels of funding. I’m Kevin Hursh.

October 23, 2007

Wannabe MLAs with an agriculture connection
It’s interesting to look through the list of candidates running for the three main political parties and pick out wannabe MLAs who have been prominent in agriculture. Erhard Poggemiller is running for the Liberal Party in the Kindersley constituency. Poggemiller has been involved in a number of farm machinery improvements over the years. Among the Saskatchewan Party candidates, a couple of new names have agricultural connections. Don Saelhof is running in Regina Dewdney. Over the years, Saelhof has been involved with companies such as Brandt Industries, Millstreet Development and Leon’s Manufacturing. He also did a short stint as executive director of APAS. Jim Reiter is running for the Sask Party in Rosetown – Elrose. He’s well known for his work as administrator for the Rural Municipalities of Marriott and Pleasant Valley. For the NDP, here’s a familiar name – Gordon MacMurchy. Gordon MacMurchy Senior was an NDP agriculture minister back in the early 80’s. His son, Gord MacMurchy is running for the NDP in the Arm River – Watrous constituency. Some of these folks will probably become MLAs. Others are long shots. I’m Kevin Hursh.

October 22, 2007

Ethanol will hurt barley prices
Ethanol production is good for wheat prices, but it will be negative for barley prices. That observation comes from Daryl McLoughlin, the Director of Merchandising and Market Development for South West Terminal. Right now, corn is pouring into Western Canada from the U.S. Barley is in short supply worldwide, so U.S. corn is a cheaper feed source. Daryl McLoughlin points out that in addition to corn, dried distillers grains are also coming into Canada. As ethanol production increases in Western Canada, DDGs will become more readily available from Canadian plants. DDGs from the U.S. are based on corn. Here in Western Canada, ethanol is being made from wheat. McLoughlin expects that this year’s high barley prices will spur more barley to be planted in a number of countries around the world. With high rail freight rates as well as record high ocean freight costs, Canada is not in a good position to compete in the world market when barley is more readily available. Having livestock feeders in Western Canada turn to corn and DDGs this year will make a switch to those feed sources even easier in the years to come. Ethanol production here and in the U.S. will add to the feed sources competing against barley. I’m Kevin Hursh.

October 19, 2007

Money will flow to Alberta livestock producers
In recent years, Alberta grain producers have often received extra assistance from their government – assistance unavailable to producers in other parts of the country. They continue to have a number of programs we don’t enjoy in Saskatchewan. Now, Alberta livestock producers are having a turn. The Alberta Farm Recovery Plan has just been announced. It’s meant to help offset the rising costs of fuel, feed and fertilizer. The $165 million in support is being described as one-time transitional assistance. Payments will be based on tweaking the 2006 information from the CAIS program. Further details on just how that’s being done are not yet available. For producers in CAIS, the calculations will be automatic and they will not have to submit an application. Money is expected to start flowing to livestock producers next month and the $165 million is supposed to be all distributed by early 2008. It’s amazing how quickly and easily money can flow to Alberta producers. Here in Saskatchewan, we can only watch with envy. I’m Kevin Hursh.

October 18, 2007

Importing corn and exporting feed barley
More American corn than usual is coming into Western Canada. Meanwhile, feed barley exports out of Western Canada will be much higher than usual. On the surface, it doesn’t make much sense. Feed barley faces a steep rail transportation bill to get it to port position. Then it faces record high ocean freight costs to reach customers in Japan and Saudi Arabia. Even after all these costs, the export market is currently competitive with what feed barley is worth on the domestic market. A bulletin by the Market Analysis Division of Agriculture and Agri-Food Canada shows our feed barley exports were very low last crop year – only about 100,000 tonnes. This year, feed barley exports are expected to approach a million tonnes. That’s nearly as high as the expected exports of malting barley. Some countries want feed barley and when supplies are short in the other exporting countries - Australia, Ukraine, Europe and Russia - they’ll pay enough to draw it out of Western Canada even though the transportation costs are huge. As the Ag Canada bulletin explains, Japan considers barley a unique feed ingredient for cattle since it produces beef with the firm, white marbling that’s preferred by consumers. Saudi Arabia prefers barley to feed its sheep and goats. So while livestock overseas is consuming Canadian barley, many Canadian livestock will be consuming imported American corn. I’m Kevin Hursh.

October 17, 2007

Wanted: Ag vision in politics
So far in the provincial election campaign, the only promise by one of the main parties directly related to farmers has been the Saskatchewan Party commitment to build on the education tax rebate established by the NDP. Any moves to lessen the education tax on farmland will be appreciated, but unfortunately, neither the Sask. Party nor the NDP is proposing a way to fix the problem once and for all. The PC Party of Saskatchewan has been revived for this election. While they are unlikely to be a factor in the results, their leader Rick Swenson has issued an agriculture policy with some interesting ideas. Swenson says the PC Party would encourage community-based development of ethanol and biodiesel production along side intensive livestock operations. Saskatchewan’s first ethanol plant was integrated with the Poundmaker feedlot at Lanigan back in the 90s when Grant Devine was Premier. Borrowing from a Saskatchewan Agrivision idea, Swenson says the province should match dollars with other governments and the private sector to establish an inland container port in Saskatchewan to help value-added agricultural processing. Swenson points out that a PC Party government brought about the last large scale irrigation development along Lake Diefenbaker. He’s calling for continued investment in water development. While the PC Party is now on the fringe, at least they’re forwarding ideas that have some vision. Hopefully, the main parties will do that as well. I’m Kevin Hursh.

October 15, 2007

Wells Fargo economist says lock in prices before they drop
Not all agricultural economists have a bullish view of grain prices. Michael Swanson is in the economics department of Wells Fargo & Co. in the U.S. Swanson does a good job of explaining what’s happening in the U.S. ethanol industry and why that’s resulting in less corn consumption than anticipated. There are really two markets for ethanol. One is as oxygenate to improve the quality of gasoline. This is the mandated use of ethanol and for this market, there’s a high value. Any additional ethanol has to replace gasoline in the marketplace, and for this market ethanol is typically discounted relative to the price of gasoline. As ethanol production has skyrocketed in the U.S., more and more ethanol has been pushed into the lower value use. With reduced profitability, the expansion of ethanol plants is slowing and less corn than anticipated is being consumed. Some analysts crunch the numbers and say corn production will be hard pressed to keep up with the overall demand. Michael Swanson’s analysis is that U.S. farmers only need to plant 82 million acres of corn next year to meet next year’s usage. This would mean a dramatic acreage shift back into wheat and soybeans. Thus, according to Swanson, all three commodities are likely to see prices slip. Swanson’s advice is to lock in prices for old crop and new crop production before prices fall. Swanson’s analysis posted on the Wells Fargo website is an interesting counterbalance to the optimism that’s now prevalent among grain market analysts. I’m Kevin Hursh.

Grain or grass?
Will land that was converted to grass in recent years be switched back into grain production? Cow-calf producers are facing a tough year and no doubt some producers will exit the cattle business. Meanwhile, grain prices are amazingly strong. If you were able to grow a good crop this year, your returns are attractive. Prices are in profitable territory for almost every crop and the short to mid-term outlook is positive. So, on the surface it would make sense to assume that the grain to grass conversion is going to be reversed. However, input costs are likely to continue rising in tandem to grain prices. In my view, it’s still going to be tough to make much money growing crops on land that’s marginal for grain. Personally, I plan to seed a bit more grass late this fall. As equipment gets larger, there are some corners and side hills and narrow strips that just don’t any sense for grain production. If land doesn’t produce well or if it puts your equipment at risk, it isn’t worth farming, even with high grain prices. And I have no intention of breaking up the land that has been seeded back over the years. It was put into grass because of salinity, hills and/or rocks and I’ve never missed it. I can understand producers wanting to put land back into production if it can consistently grow a good crop, but most of what’s in grass is probably better off in grass over the long term. I’m Kevin Hursh.

October 11, 2007

Biofuels Offset Program proposed for Alberta
Alberta Pork says hog producers in that province are losing up to $50 per animal and the organization has come up with the Alberta Pork Industry Recovery Plan. Part of that recovery plan involves a Biofuels Offset Program. In other words, the Alberta government would provide feed grain subsidies to offset the ethanol subsidies that are driving up feed grain prices. This is reminiscent of the Alberta Crow Benefit Offset Program back in the 80s. The Alberta government didn’t like the Crow grain transportation subsidy saying it drove up the domestic price of feed grain. The Crow Offset made feed grain cheaper for Alberta livestock producers and that’s one of the reasons why the vast majority of the country’s feedlots are in Alberta. While one can understand the desperation currently facing hog producers, Alberta producers are in the same boat as producers everywhere else. Feed grain costs have gone up across North America. The advantage being enjoyed by American hog producers relates largely to the value of their greenback, their proximity to efficient processing plants and their lower labour costs. Hopefully the Alberta government will resist the temptation to subsidize its producers through a feed grain offset. That sort of program would put Saskatchewan hog producers at a disadvantage. Plus, it could lead to countervail action by the Americans that would hurt the entire Canadian industry. I’m Kevin Hursh.

October 10, 2007

Biodiesel plants bypass Saskatchewan
While Saskatchewan has lots of ethanol activity, biodiesel plants are going to Alberta. On Monday at Fort Saskatchewan, Alberta there will be a groundbreaking ceremony for Canadian Bioenergy’s new biodiesel plant. The plan is for a facility adjacent to the Bunge canola crushing plant that can produce 225 million litres of biodiesel a year. In the most recent edition of Canola Digest, you can read about the other biodiesel facilities that are planned. Dominion Energy Services is planning a canola crusher integrated with a biodiesel plant, as well as an ethanol plant near Innisfail, Alberta. The plan is for 379 million litres per year of biodiesel. A third big Alberta biodiesel plant has been announced by Biostreet Canada for Vegreville, Alberta. That plant will be 175 million litres per year. All three plants are scheduling 2009 for the start of production. There are no biodiesel facilities of this scale planned in Saskatchewan. Milligan Biotech of Foam Lake has expanded, but its capacity is a mere 15 million litres per year. Why are the big biodiesel plants going to Alberta? The feds are committed to support of 20 cents a litre for biodiesel. The industry says that isn’t quite enough to match the big subsidies in the U.S. Alberta has come to the table with extra money and that’s one of the main reasons why these big plants are planned for Alberta and not Saskatchewan. I’m Kevin Hursh.

The early bird got a rotten worm
Forward pricing grain has cost producers money this year. The usual advice is to lock in some profitable prices when they’re available. I had a couple loads of peas locked in early at $5 a bushel that I now regret. It seemed like a great price at the time. It doesn’t look so good now with peas at $7 a bushel. The same situations exist south of the border. Tom Mick, president of the Washington Wheat Commission, is quoted by Associated Press as saying many farmers sold their wheat before the recent price surge, sometimes against their will when bankers called in loans. Much of the wheat, says Mick, sold for less than $5 a bushel, which seemed reasonable after prices had hovered around $3.50 to $4 a bushel for several years. Jim Peterson, marketing director for the North Dakota Wheat Commission was quoted by Farm & Ranch Guide as saying some producers are getting $10 a bushel for their durum, but that’s rare because so many took advantage of the good prices at $7 a bushel. This year the market has certainly rewarded producers who were patient and didn’t price too soon. As producers look to price the balance of their 2007 crop and as they look ahead to forward pricing opportunities for ’08, it’s difficult to come up with a strategy, because you can also lose by waiting too long. I’m Kevin Hursh.

October 9, 2007

Ethanol profits drop
Ethanol production in the U.S. isn’t nearly as profitable as it was a year ago, but make no mistake, ethanol production continues to expand and it will continue to have a big effect on world grain markets. On October 1, VeraSun Energy Corporation, one of the biggest ethanol producers in the U.S. announced it was suspending construction on its 110 million gallon per year ethanol plant in Reynolds, Indiana. The company sited the abrupt change in market conditions that have seen ethanol prices drop nearly 50 cents per gallon in the past couple months. The VeraSun announcement is a sign the ethanol expansion is slowing down, but it’s important to note that VeraSun has four other new facilities in Iowa, Minnesota, Nebraska and Ohio where construction is continuing. And it has four big production facilities in operation – one in South Dakota, two in Iowa and one in Indiana. Analysts say that even with ethanol now worth a dollar a gallon less than gasoline, the industry is still profitable given the government support it receives. The American ethanol industry isn’t enjoying the huge returns it once did and the rate of expansion has slowed, but an ever-increasing amount of grain is being consumed for ethanol production. I’m Kevin Hursh.

October 5, 2007

Saskatchewan has lowest crop yields
Which of the three Prairie provinces has the highest crop yields? This year, for most of the major grains it’s Manitoba. Saskatchewan has the lowest yields in each case. In the production estimate released yesterday by Statistics Canada, wheat yields in Manitoba are expected to average 41 bushels per acre, while Saskatchewan’s average is pegged at 29. Oat yields average 82 bushels per acre in Manitoba, 72 in Alberta and just 66 in Saskatchewan. Both Manitoba and Alberta have average barley yields of just under 60 bushels per acre. Saskatchewan’s barley yield is 47.5. Alberta has the highest flaxseed yield at 25 bushels per acre, but that’s on a limited acreage. The average flax yield in Manitoba is 21.6 while Saskatchewan is at 18.4. Alberta has the best canola yield this year – 30.7 as compared to only 24.8 in Saskatchewan. Manitoba has the best field pea yield at 36.8 as compared to 30.2 in this province. As compared to Manitoba, producers in this province will have gross returns that are $25 to $70 per acre lower due to lower production. I’m Kevin Hursh.

October 4, 2007

Calf prices continue to fall
The economic picture for cow-calf producers is going from bad to worse. The strong Canadian dollar has cut returns for fed cattle. At the same time, feed grain prices are moving into record high territory. Corn in the U.S. is actually a better bargain than barley in Western Canada and that makes it difficult to be competitive on this side of the border. As a result of these factors, calf prices have been dropping like a stone the past couple weeks as we move into what is usually the main part of the fall calf run. Prices dropped by about 10 cents a pound in most weight ranges in the last week of September. Prices steadily declined last fall too, but on 550-pound steer calves the average price is currently about 25 cents a pound lower than a year ago at this time. That’s $130 an animal. You can’t blame the feedlots. They have to reduce their bids in an attempt to preserve some margin. There are no easy answers. Unfortunately, most cow-calf producers don’t have great reference margins from the CAIS program because returns over the past five years have not been strong. The beef industry received a lot of public sympathy during the BSE crisis. This fall is another rough time particularly for cow-calf producers, but the public is largely oblivious to the problem. I’m Kevin Hursh.

October 3, 2007

Farmland values rise
According to Farm Credit Canada’s appraisal of benchmark farmland properties across the country, farmland values in Saskatchewan rose by 3.0 per cent in the first six months of this year. That’s the largest six-month increase in the ten years of historical data provided by FCC. Saskatchewan has the lowest land prices in the country, but for the first half of 2007, our increase in values lags only Alberta at 6.4 per cent and B.C. at 3.7 per cent. We’re ahead of Manitoba at 1.7 per cent and Ontario at 2.7 per cent. Of course, averages are always a bit misleading. As noted in the FCC analysis, investors are paying a premium for high quality land often located near urban centres. I’ve heard that land prices are particularly hot in the Regina plains and also around Aberdeen, northeast of Saskatoon. However, there are also pockets where land is more marginal for grain production and prices are stable at best. Saskatchewan has had a below average harvest this year, but grain prices are showing amazing strength. It’s my guess that land prices will continue showing gains in Saskatchewan. These are not good times for cattle and hog producers, but the agriculture economy in Saskatchewan is dominated by the grains sector. I’m Kevin Hursh.

October 2, 2007

Dairy technology
I had the opportunity yesterday to visit with a dairy farmer near London, Ontario who has just built a new modern barn and milking parlor. I don’t visit a lot of dairy farms so I was taken by the technology being employed. I’ve seen transponders hanging around the necks of dairy cows to identify the animals as they’re being milked and fed. This producer was using small transponders in ankle bracelets for each of his cows. Each transponder was read by a receiver located near the floor of the milking area. In addition to recording each cow’s production for the day as well as her time of milking and the temperature of the milk, the transponders also recorded the number of her footsteps for the day. In his office, the producer could generate a graph with all the measured functions for each cow. A cow with heightened body temperature that also shows an increase in her level of activity recorded as the number of footsteps is likely in heat. Of course, this is critical information for knowing when to artificially inseminate. The computer program went one step further. After milking, each cow exits separately through a gate. Each cow is identified by her transponder walking down the alley and the producer can program the gates to automatically sort specific cows into different pens. Technology has come a long way. I’m Kevin Hursh.

October 1, 2007

Early Payment Option improves
After last week’s big increase in the Pool Return Outlooks on wheat, durum and barley, Early Payment Option values are looking a lot more attractive. There should be an increase in initial payments soon, but initial payments will still be way behind the true value. On top quality spring wheat, the 80 per cent Early Payment Option can now provide a Saskatchewan average price of $4.81 a bushel. The discount or premium is 9 cents a bushel. The 90 per cent EPO carries a discount of 24 cents a bushel, which a lot of producers may consider too expensive. On top quality durum, an 80 per cent EPO gives a price of $8 a bushel after paying a discount of 14 cents a bushel. On the top grade of two-row designated barley, the 80 per cent EPO carries a discount of 5 cents a bushel. The 90 per cent EPO is just 8 cents a bushel. The 90 per cent EPO gives a producer about $4.10 a bushel for two-row malting barley after average deductions. Producers may want to wait a few days to see what the initial payment increase comes to. A higher guaranteed initial payment may decrease the discounts producers have to pay on EPOs. Much more information is available on the Canadian Wheat Board’s website (www.cwb.ca). I’m Kevin Hursh.

Hursh on Agriculture

Archives