Hursh Consulting & Communications: Kevin Hursh on Agriculture

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Hursh on Agriculture

November 30, 2007

Container costs likely to increase
The latest newsletter from CGF Brokerage and Consulting of Saskatoon says uncertainty over rising costs related to the movement of containers is affecting the pricing of crops such as lentils. According to CGF, the container industry has been saying a freight increase is coming, but specifics have not yet been provided. On top of this, it’s widely believed that tonnage limits will be decreased. It’s expected that 20-foot containers will be limited to 20 tonnes of weight rather than the 22 or 23 tonnes that is currently moved in a 20-foot can. A freight increase and the possibility of other increases such as a fuel surcharge, on top of a drop in the weight limit, could mean a substantial increase in costs. CGF estimates the increase could be as much as $30 a tonne. The changes are important to crops that move primarily by container, such as lentils and chickpeas. The uncertainty has been affecting new container business from January 1 forward. If the changes are implemented, it’s going to increase costs by about 1.5 cents a pound on crops like lentils. Producers will see that in lower crop bids than they would have otherwise received. I’m Kevin Hursh.

November 29, 2007

Pea prices are amazing
The price of yellow peas just keeps going up. In southwestern Saskatchewan, if you’re willing to hold off on delivery until the spring, prices as high as $9.00 a bushel are now available. Many producers locked in prices for some of their 2007 peas long before seeding at $5 to $5.50 a bushel. Being able to lock in those kinds of prices seemed like a good deal. Shortly after harvest, prices were in the $7 a bushel range and that seemed like a good deal. In recent weeks, prices have quickly increased to $8 and are now moving up towards $9. A few companies are starting to offer pricing opportunities for the 2008 crop. I’ve heard contract prices for new crop yellow peas in the $7.00 to $7.50 a bushel range. That’s a profitable price and some analysts advise that you’ll never go broke locking in a profit. On the other hand, producers who didn’t lock in pea prices for this year are now enjoying much bigger profits from a soaring market. Knowing what to do is a dilemma, but it’s a rather nice dilemma to have. I’m Kevin Hursh.

November 28, 2007

Malting industry calls for open market
A new voice has weighed in on the Canadian Wheat Board debate. Producers are not used to hearing from the Malting Industry Association of Canada, which represents the four major malting companies in the country. However, yesterday the association issued a news release saying it was offering its full support to the federal government to begin the legislative process to implement market choice for barley farmers beginning next August 1. The association says that over the course of the past three months it has held extensive discussions with the Canadian Wheat Board in order to develop alternative mechanisms for marketing barley. “Unfortunately,” says the Malting Industry Association, “positions proposed by the CWB so far have not addressed the fundamental issue of providing market-driven price signals to both growers and end-users.” The Western Barley Growers and the Western Canadian Wheat Growers have jumped on this public position taken by the malting association to renew their calls for action. Up until now, the message from the malting industry has been that they could work within the CWB system or in an open market. They just wanted the rules to be clear. Now, the major malting companies are clearly on the side of an open market and you can bet the federal government will make note of their position. I’m Kevin Hursh.

November 27, 2007

How much do you like those cows?
It isn’t very popular, so a lot of people avoid the topic. However, with the poor returns in the cattle industry, more observers are saying that small beef herds don’t make a lot of economic sense. Gary Pike of Pike Management Group has an interesting article on the topic in the November issue of Country Guide. There’s no agreement on what the number is, but anyone who analyses returns and costs says that 50 or 70 or even 100 head of cows are a lot of work for very low returns. Often the overhead costs from machinery and buildings are eating up any profits, even in the good years. Running a reliable tractor with a front-end loader and having early spring calving facilities can cost a lot of money per animal with a small herd. In the good years, lean and efficient cow-calf operators are lucky to make a $100 per calf once all costs are included. At that rate, a family would need to keep 500 or more cows to make a living just from their cattle. Small herds are often combined with grain operations and it can be difficult to separate which costs, particularly which fixed costs, should be attributed to each operation. But this is still a very useful exercise. If more producers took a hard look at their returns and their true costs, there would be fewer producers with small cattle herds. I’m Kevin Hursh.

November 26, 2007

Dry soil heading into winter
Subsoil moisture is low over about two-thirds of the Saskatchewan grainbelt. Saskatchewan Agriculture and Food publishes a November 1 Stubble Subsoil Moisture Map each year. This year’s map shows that there’s good to very good subsoil moisture in the area north of Lloydminster to Meadow Lake and over to Prince Albert. There’s also good to very good moisture from Saskatoon all the way to Yorkton. Good is defined as three to four inches of available water in the soil. Very good is more than four inches. Surprisingly, there’s an area around North Battleford and another one around Tisdale where subsoil moisture is poor to very poor. It’s also dry across a big chunk of the central and southern grain belt. If you dry a line from Macklin on the Alberta border over to Outlook to north of Regina and then down through Estevan, almost everything south of that line is listed as poor or very poor. Poor is defined as one to two inches of available water in the soil. Very poor is less than an inch of water stored in the soil. Most of Saskatchewan is going to be looking for snow and rain to replenish subsoil moisture. I’m Kevin Hursh. (I find things very hard to find on the Sask Ag and Food website, so here’s a direct link to the map: http://www.agriculture.gov.sk.ca/Default.aspx?DN=a1ad547e-2bf5-4f42-9d6f-88a681e84ace)

November 23, 2007

Recruiting agriculture students
The College of Agriculture and Bioresources at the University of Saskatchewan has an active student recruitment program these days. Spearheading the effort is Jon Treloar, community liaison coordinator for the college. Since he was hired a few years ago, the college is much more visible at events such as Canadian Western Agribition. Back in 2000, there were 185 degree graduates from the college. That fell to just 79 grads in 2006. That downward trend seems to have been reversed. As of September, the College reported 100 students in fourth year, and about 130 students in each of the other three years. As well, there’s now a separate Bachelor of Science in Agribusiness, which has 26 students in first year and 32 in second year. In addition to having a booth at events like Agribition, Jon Treloar does high school visitations telling students what the College of Agriculture and Bioresources has to offer. Agriculture is far more than farming, but it’s tough to get that message through to high school teachers and guidance counselors. As Jon says, “Anyone interested in science or business should at least look at it.” While the degree program at the college seems to have stabilized its numbers, the two-year diploma program is not doing well. There were only 39 grads in 2006. Current enrolment is 26 students in second year and just 18 students in the first year of the program. The College is working to redesign the diploma program to make it more attractive. I’m Kevin Hursh.

November 22, 2007

Ethanol debate needs better analysis
The George Morris Centre based in Guelph, Ontario has issued a report detailing what it sees as the downside of ethanol for Canada. According to the George Morris Centre, Canadian ethanol production will not affect world grain prices, but it will keep Canadian feed grain prices relatively high as compared to U.S. prices. This, says the centre, will hurt the Canadian livestock industry and affect Canada’s strategy to be a major meat exporter. The report has some interesting observations, but as a grain producer I’m not thrilled with the suggestion that Canada should forego the jobs and economic activity from ethanol production just so I can sell my grain at a discount as compared to what American producers are receiving. It’s also interesting to note that the well known economists who wrote the report spent no time analyzing the impact of distillers’ grains. The U.S., with much more ethanol production, also has far more distillers’ grains for their livestock industry – particularly for cattle producers. Here in Western Canada if we process more grain for ethanol rather than exporting it, we should also have a greater supply of distillers’ grains. The George Morris Centre makes no reference to this. In fact, the report contains no new research, but simply quotes from other published reports opposing ethanol. An “independent agri-food think tank dedicated to provoking informed dialogue” should be able to do better. I’m Kevin Hursh.

November 21, 2007

Many beef producers exiting the business
Touring through the barns at Canadian Western Agribition, you wouldn’t know the beef industry is on the verge of a major restructuring. Everything seems “normal”, but the Canadian beef herd is shrinking as producers exit the business. Take a cow-calf producer selling 100 calves this fall. That’s a much bigger operation than the average, but even that producer will have grossed only about $50,000 for a year’s work and investment. After considering all the expenses involved, most producers, even efficient ones, are losing money this year. Most of the small to mid-sized beef operations in Saskatchewan are run in conjunction with a grain farm. With unprecedented strength in grain prices, many of these mixed farms are showing a good bottom line. However, an enterprise analysis will show the profits coming from the grain and not the cattle. Many producers will tell you that having both enterprises provides stability – that many years the cattle have carried the operation when grain returns were ugly. That may be true, but the beef business appears to be going into a prolonged downturn and many producers are bailing out. High grain prices, the high value of the Canadian dollar and the lack of labour have converged and will cause a restructuring of the cattle industry. At the beginning of this year, there were 1.48 million beef cows in Saskatchewan – about 30 per cent of the national herd. Expect numbers here and across Canada to drop significantly as many producers sell off their herds. I’m Kevin Hursh.

November 20, 2007

Beef producers face challenges even with open border
At long last, the final restrictions have been removed from Canadian cattle and beef going to the U.S. So far at least, the protectionist American farm group known as R-CALF has been unsuccessful in blocking the new rule from the U.S. Department of Agriculture. Older Canadian cattle and their meat products can now cross the line. While this is good news, it won’t do much to turn around the low prices producers are receiving. Cattle have to be born after March 1, 1999 to be eligible for export. They must be certified by a CFIA accredited veterinarian, a process that includes an animal health inspection, age verification and permanent identification requirements. Meat from animals of any age can cross the border. Hopefully, the new rule will help the value of older animals, but with the various requirements, Canadian prices will not reach equivalency with the U.S. Ending the restrictions should be good news for the export of purebred breeding stock. With Agribition underway in Regina, we should know more about that in the days ahead. However, American dollars don’t buy nearly as much in Canada as they did back in 2003 when the BSE crisis began. The high value of the loonie as compared to the American greenback is the biggest single reason for the difficulties being faced by Canadian livestock producers. I’m Kevin Hursh.

November 19, 2007

Big adjustment payments coming
Producers who have delivered wheat, durum or barley this crop year are going to get an early Christmas present. Big adjustment payments have been approved. On feed barley, the increase is more than $2 a bushel and it’s about $1.30 a bushel on designated barley. On wheat and durum, the payments vary by grade and protein content, but they’re in the range of $1.50 a bushel on spring wheat and a whopping $3.50 a bushel on durum. I can’t remember adjustment payments ever being this large. On durum, even after the adjustment, initial payments will still be more than $4 a bushel less than the Pool Return Outlook, so there’s lots of room for further increases. The new price levels come into effect on Thursday (November 22). For deliveries already made in this crop year, adjustment payments will be mailed December 7 or received by direct deposit on December 4. A number of producers may want to defer the payments until the new calendar year in order to even out taxable income. Producers wanting to defer need to notify the Canadian Wheat Board by November 28. For producers who grew a good crop this is going to be a banner year. Prices are attractive on almost all grains, oilseeds and specialty crops. I’m Kevin Hursh.

November 16, 2007

Hog producers consider survival strategies
There’s a brighter future ahead for Canadian hog producers. The question is whether they can survive long enough to see those improved returns. Speaking at the Pork Symposium yesterday in Saskatoon, Florian Possberg of Big Sky Farms made the bold prediction that slaughter hogs will be worth $2.40 a kilogram in May of 2009. That would be nearly three times the current price. Possberg believes livestock prices will eventually rise to a new plateau to match the increase in grain prices. This year has been a financial bloodbath for the hog industry and little or no profitability is expected next year. Some observers are advising producers to get out before all their equity is gone. Others suggest producers may want to look for outside investors to carry them through. Possberg believes the Canadian dollar can’t stay high forever and that the situation will start to look brighter sooner than many people think. “Catch a breath. It’ll settle down,” advises Possberg. The low value of the American dollar has meant a period of unprecedented profitability for U.S. hog producers. Only recently have they started to lose a bit of money. Possberg says one strategy for survival is to have hog operations on both sides of the border. Increasing, Canada is the location for farrowing with the young pigs shipped south for feeding. I’m Kevin Hursh.

November 15, 2007

Understanding CWB program details can make you money
Whether or not you like the Canadian Wheat Board, it’s important to pay attention to their programs to maximize returns. For instance, the CWB has just announced 100 per cent acceptance for Series A wheat and durum contracts. If you didn’t commit all your wheat to Series A, and if you want to sell it this crop year, you’d better commit to Series B. The CWB says further acceptance will be determined based on pries and sales opportunities. If additional acceptance is expected to lower the pool return, the CWB may not be accepting any deliveries of wheat under Series C. The deadline for committing wheat to Series B is the end of January. There is no Series C for durum. On durum, the deadline for Series B is the end of April. Another example of the importance of understanding CWB programs is on the Early Pricing Option. Some of the 80 and 90 per cent Early Payment Values are being terminated. The CWB has recommended adjustment payments that in some cases will raise initial payments to near or above the Early Payment Values. There’s no use charging producers a discount to lock in an Early Payment Value, when comparable initial payments will soon be available. The Early Payment Option can serve a useful purpose, but timing is everything. I’m Kevin Hursh.

November 14, 2007

Cattle and hog producers join forces
During the second week of November, 550 pound steer calves in Saskatchewan sold for an average of just over 98 cents a pound. A year ago, the price was $1.15 and two years ago at this time, prices averaged $1.35. A $200 drop per calf in two years is hard to take. Lots of bred cows are going to market and they’re fetching bargain basement prices that range from $300 to $700 per animal. Hog producers are facing a future that may be even bleaker. Imagine taping two or three 20-dollar bills on the backside of each slaughter hog going to market. That’s the magnitude of the losses being incurred and any return to profitability will not be swift. We’re feeding a lot fewer hogs in Saskatchewan these days. Instead, weanling and feeder pigs are being trucked to the U.S. to be fed. American corn is cheaper, American packing plants pay better and you can get more pigs on the truck when they’re small. Watch for the cattle and hog sectors to go forward to governments with a united front. They are unlikely to ask for direct subsidies that could eventually form the basis for an American countervail action. Instead, they’re likely to ask for improvements to the mechanics of existing programs and other kinds of assistance that can’t be considered a handout. Hopefully, governments will listen. I’m Kevin Hursh.

November 13, 2007

Novozymes buys Philom Bios
It’s a sign of a successful company when outside investors want to buy. However, it’s still a bit sad to see strong Canadian companies gobbled up by large multi-nationals. That’s been the story for Saskatchewan based companies specializing in seed inoculants. With Saskatchewan being a world leader in pulse crops, it was natural for leading companies to develop here to provide rhizobium seed inoculants, which allow the pulse crops to fix their own nitrogen. One of those companies was MicroBio RhizoGen. A number of years ago, MBR of Saskatoon sold to Becker Underwood, a large company with operations in a number of countries. The inoculant company Philom Bios, also based in Saskatoon, has been operating for more than 25 years. Now, Philom Bios is being acquired by Novozymes. With over 700 products used in 130 countries, Novozymes claims to be the world leader in bio-innovation. Novozymes made an attractive offer and the board of directors for Philom Bios is unanimously recommending that shareholders accept the all-cash offer of $6.50 per share. Over 70 per cent of the shares have already been secured and the transaction is expected to close in December. It’s good to see Philom Bios shareholders being rewarded, but company control is moving outside of the country. I’m Kevin Hursh.

November 9, 2007

Li vestock groups work to raise awareness of the financial plight
A couple days ago, I expressed the opinion that the organizations representing cattle and hog producers have not been doing enough to publicly express the depth of the financial distress facing the livestock sector. That commentary generated an e-mail response from Brad Wildeman, vice president of the Canadian Cattlemen’s Association who provided an extensive list of the work the CCA is doing behind the scenes to address the situation. I’ve also heard media interviews with Neil Ketilson of Sask Pork and Don Hrapchak of SPI Marketing Group detailing the plight of hog producers. As well, the new general manager of the Saskatchewan Cattle Feeders Association, Susan Echlin has generated a news release from that organization. The release quotes the president of Saskatchewan Cattle Feeders, Bill Jameson saying, “Our industry is in crisis, and many of our producers face even greater difficulties than they did in the thick of BSE.” Jameson says the rising Canadian dollar, increased feed costs, and new regulatory issues are making it difficult for Saskatchewan cattlemen to remain competitive. I’m pleased to see livestock organizations becoming more vocal. There’s a very low level of awareness among politicians and the general public about the severity of the problems. A lot of livestock producers are not going to survive to see brighter days unless some short term solutions can be found. Part of finding solutions is to raise awareness. I’m Kevin Hursh.

November 8, 2007

Ag expectations of new Sask. Party government
What can agriculture expect from Brad Wall’s Sask. Party government? The Sask. Party promised increased education tax rebates and a review of Saskatchewan Crop Insurance. Those should be easy promises to keep. Whether the crop insurance review actually results in significant changes is another question. With the ousting of the NDP, the Canadian Wheat Board has lost an ally. That could be significant with the federal Conservatives promising to implement marketing choice one way or another. The Sask. Party is much more firmly grounded in rural Saskatchewan than the NDP, so one would expect them to be more sensitive to the needs of farmers and small communities. Bob Bjornerud, the MLA for Melville – Saltcoats was the Sask Party agriculture critic in the last legislature and it’s reasonable to assume that Bjornerud will be the next agriculture minister. Rather than dealing with a struggling grain economy, which has been the norm over the years, the new agriculture minister will be asked for ways to assist the ailing livestock sector. The NDP was supportive of biofuels. Expect that to continue under the new administration. One of the biggest tasks for the new ag minister will be negotiating the new federal – provincial program offering. The programs have fancy names like AgriStability and AgriInvest, but there’s a lot of work to do on the details. I’m Kevin Hursh.

November 7, 2007

Livestock groups should be more vocal
The organizations that represent livestock producers have been surprisingly quiet about the major economic downturn that has hit both hog and beef producers. The Canadian Cattlemen’s Association seems to be concentrating on Rule 2 in the U.S. and whether the American border will finally open to Canadian cattle over thirty months of age. While that’s an important issue, it isn’t going to change Canadian prices all that much. Closer to home, the Saskatchewan Stock Growers Association, the Saskatchewan Cattle Feeders Association and Sask Pork have been largely silent about the big losses producers are incurring. Yesterday, the National Farmers Union issued a news release on the issue. The NFU says the problems are due to a dysfunctional livestock marketplace, the result of a situation where a handful of large corporations dominate the industry. In fact, says the NFU, Cargill owns half the packing capacity in Canada and is able to heavily influence prices at both the farm gate at the wholesale and retail levels. For the NFU, Cargill is generally the root of all evil, but the organization is at least calling for measures to help producers stay in business. Maybe other farm organizations are involved in discussions with governments behind the scenes, but it would be useful for them to be doing more to publicly acknowledge the economic malaise being faced by many producers. I’m Kevin Hursh.

November 6, 2007

Agriculture all but ignored in Sask. election
Every Saskatchewan election campaign that I can recall paid a lot more attention to agriculture than this one. The agricultural platform for all three major parties has been minimal and the leaders spent hardly any time in rural areas. The battleground has been the cities. While Liberal Leader David Karwacki talks about becoming the official opposition, he’ll be lucky to just win his own seat in Saskatoon. Most of his efforts have been on just a few key urban ridings. In most of the rural constituencies the NDP is running far behind the Sask Party. There has been no concerted effort by Lorne Calvert to close the gap. Instead the NDP has concentrated on maintaining its core support in the cities. The Sask Party by offering increased rebates of education tax on farmland and a review of crop insurance has actually promised the most for farmers. However, to form government Brad Wall has to make inroads in the cities, so his rural support has largely been taken for granted. Unlike most elections, the grain industry isn’t in a state of crisis right now. Livestock producers are facing very difficult times, but those concerns have not become an election issue. This election campaign will be memorable for a number of reasons, but agriculture has been an unusually minor part of the mix. I’m Kevin Hursh.

November 5, 2007

Selling land and leasing it back
Over the past week, I’ve talked to a surprising number of producers who are selling their land to investors and leasing it back. There are investment firms buying Saskatchewan farmland and there are individual investors, often from Alberta, doing the same thing. The lease is often 5 or 6 per cent of the purchase price. The investor is betting that the value of Saskatchewan land is going to see attractive increases. From 2001 to 2006, the average value of Saskatchewan farmland and buildings increased from $337 to $355 per acre. That isn’t a great annual increase, but investors believe it’s going to get better. For the farmers involved, there are various motivations. Sometimes it’s a way to transition out of the industry. For many others, it’s a way to generate capital. In 2001, farm debt in Saskatchewan totaled just over $6 billion. By 2006, total farm debt in the province had topped $7 billion. Reducing debt load and having money to re-invest in equipment and facilities can often mean improved returns on investment. One of the drawbacks of selling land to an investor is that you lose some control of the land base, particularly after the first three or five-year lease agreement expires. I’m Kevin Hursh.

November 2, 2007

Payments for early frost
Saskatchewan Crop Insurance will pay a surprising amount of money for earlier than normal frost under the Annual Crop Weather Based Insurance Program. Under that option, producers can top up their regular multi-peril insurance by $10 an acre or $25 an acre. They can also choose $75 an acre and not use multi-peril insurance. Payments are based entirely on weather statistics at the station or stations you pick. If rainfall is well below normal during the growing season or if the first frost is much earlier than normal, payments are triggered. The payments for each weather station are listed on the Saskatchewan Crop Insurance website (www.saskcropinsurance.com). A number of stations across are paying a small indemnity for frost. Most are less than 10 per cent, which on the $10 an acre option will be less than a dollar an acre. However, a few are more significant. Debden is paying 24 per cent, Meadow Lake is at 44 per cent, Spiritwood is 22 per cent and Willmar is 32 percent. The biggest frost payments are for Elrose and Moose Jaw at 46 per cent of indemnity. The official temperature reading at those stations dipped below freezing on August 24, several weeks ahead of normal. About the only station with a significant payment for below normal precipitation is Swift Current where 50 per cent of indemnity is being paid under the weather based insurance option. I’m Kevin Hursh.

November 1, 2007

Comparing gross returns per acre
At current prices and using Saskatchewan average yields for this year, how do you think the various crops rate based on gross returns? There are some surprises when you run the numbers. Saskatchewan Agriculture in its final crop report of the season pegs this year’s winter wheat yields in the province at 37.9 bushels per acre, as compared to only 28.7 for spring wheat. Spring wheat is worth more, but due to the yield difference the gross return on winter wheat is much better - $221 an acre for winter wheat versus $184 an acre for spring wheat. The average durum yield is lower at 26.6 bushels per acre, but with the record high price expected for durum, the gross return comes to $300 an acre. Another crop enjoying a high price is flax. However, Sask Ag and Food says the average yield of flax was only 18.4 bushels per acre. With a price of $12.50 a bushel, that’s a gross return of $230 an acre. Canola with an average yield of 24.5 bushels per acre has a very similar gross return if you assume a price of around $9.20 a bushel. All three types of mustard are grouped together in the Sask Ag numbers with a yield of 790 pounds per acre. That’s a low yield, but yellow mustard is selling for as high as 50 cents a pound, which generates a gross return approaching $400 an acre – the best of any crop this year. I’m Kevin Hursh.

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