Hursh Consulting & Communications: Kevin Hursh on Agriculture

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Hursh on Agriculture

February 29, 2008

Wheat and durum prices continue to increase
On Monday, the Canadian Wheat Board released its first Pool Return Outlook for the new crop year. Yesterday, the CWB released its latest estimate of wheat, durum and barley returns for the current crop year. Spring wheat and durum continue to show impressive gains. No. 1 CWRS wheat with 13.5 per cent protein has an expected return of $8.93 a bushel after average Saskatchewan freight and handling is deducted. That’s an increase of 79 cents a bushel from the price estimate released a month ago. No. 1 durum with 13 per cent protein now has a PRO of $12.87 a bushel, an increase of 84 cents from last month. Prices for both spring wheat and durum continue to move upwards into uncharted territory. The news on barley isn’t as exciting. The PRO has declined on feed barley sold through the CWB. Pool B which covers the second half of the crop year, is down by 15 cents to $4.10 a bushel. The board blames weak offshore feed barley demand, larger than expected export supplies from Australia and increased supplies of substitutable feed grains. The PRO for designated barley is unchanged from last month. Two-row malting barley remains pegged at $4.92 a bushel, which is disappointing compared to what’s happening with other crop prices. I’m Kevin Hursh.

February 28, 2008

BSE in young cows is disconcerting
This discovery this week of another case of BSE, this time in an Alberta dairy cow, may not seem like a big deal here in Canada. Unfortunately, it gives American protectionist interests more ammunition. The cow was only six years old meaning she was born long after the 1997 ruminant-to-ruminant feed ban. There have now been 13 cases of BSE in Canadian cows with seven of those cases being animals born after ’97. The Americans have opened the border to Canadian cattle born after March 1, 1999. The protectionist American farm group known as R-CALF is quick to point out that there have now been six BSE discoveries in cattle born after ’99. This latest animal was born in 2002. The tissues that are most likely to harbour BSE prions are being removed in all slaughter animals, so any health risk should be remote. However, R-CALF claims that a Canadian cow with BSE could easily be exported to the U.S. That would be a big problem from a public relations point of view. On this side of the border, an occasional BSE discovery no longer makes much news. On the other side of the border, the U.S. has just had the largest recall of beef in its history due to downer cows going into the food supply and the resulting risk, although minute, of BSE. We shouldn’t underestimate American sensitivity on this issue. I’m Kevin Hursh.

February 27, 2008

$10 wheat is real
This is the most amazing bullish run ever seen in grain markets. On one day this week, the Minneapolis March spring wheat futures price increased by $4.75 a bushel. That was in just one day. Trading limits are off on that contract. Other contracts in Minneapolis, as well as in Chicago and Kansas City have greatly expanded daily trading limits. While nothing is as wild as the March Minneapolis contract, all wheat has had rapid gains unlike anything we’ve ever witnessed. Some observers say the Fixed Price Contracts offered through the Canadian Wheat Board do not fully reflect the new crop pricing opportunities available on the American markets. However, the Fixed Price Contracts announced just this week are offering some amazing values. After paying the CWB’s basis deduction and after deducting average Saskatchewan freight and handing, as of yesterday’s quotations a producer could lock in a new crop price for No. 1 CWRS wheat with 13.5 per cent protein of around $10.50 a bushel. The fabled $10 wheat has actually arrived. Of course, producers have to be cautious about production risk. If you don’t produce as much as you lock-in it could be costly. With almost all grain, oilseed and specialty crop markets hot, the biggest concern for the upcoming growing season is producing a good crop so that you can take advantage of the prices. I’m Kevin Hursh.

February 26, 2008

New crop price predictions
The first Pool Return Outlook for the 2008-09 crop year has been released by the Canadian Wheat Board. While any projection made this far in advance of the new crop year might be far off the mark, it’s interesting to see the price projections as seeding plans are finalized. The CWB is forecasting a significant increase in wheat prices. Assuming that freight and handling charges are the same as in the current crop year, the average Saskatchewan price for No. 1 CWRS wheat with 13.5 per cent protein is expected to be just under $9.00 a bushel. The durum price is expected to decline from the levels seen in this crop year, but durum is still forecast to maintain a significant premium over spring wheat. The new crop Saskatchewan price for No. 1 durum with 13.0 per cent protein is pegged at about $11.20 a bushel. The Pool A feed barley price in the new crop year is expected to slip a bit from current levels. The Saskatchewan price works out to about $3.73 a bushel. However, the malting barley price is expected to improve. The CWB notes that there is considerable uncertainty over whether the federal government will implement an open market for barley. Assuming the single desk authority remains in place, the Saskatchewan pooled price for two-row malting barley is forecast to be about $6.45 a bushel. I’m Kevin Hursh.

February 25, 2008

Consider the variable price option for more Crop Insurance coverage
The 2008 program from Saskatchewan Crop Insurance was announced on Friday. The insured prices for crops are lagging the market badly. The prices are based on a forecast made in December and expectations have shot up since then. Here’s a sampling of the Crop Insurance prices: hard red spring wheat - $5.31 a bushel; durum - $8.14 a bushel; barley - $3.27; flax - $11.56 a bushel; canola - $9.19; field peas - $5.78; large green lentils - 23 cents a pound. While these prices are low compared to the current market, they’re much higher than last year. That means increased dollar per acre coverage, but it will also mean increased premiums. The premium rate is dropping by 4 per cent, but that’s minor on a crop like flax where the crop price has doubled since last year. Endorsement packages containing all the details are supposed to be mailed soon. Brace yourself for some high premium costs per acre. If you want the potential for more coverage per acre, which would come with an even higher premium, the variable price option is again available. Under that option, the insured price is based on a July forecast and the price can increase or decrease by a maximum of 50 per cent in relation to the base price. You can pick and choose which crops to put under the variable price option. I’m Kevin Hursh.

February 22, 2008

Protect your grain from theft
There’s been at least one major report of grain theft this winter. With the increasing value of grain, you have to worry that there will be more incidents. At present prices, a 40 tonne super-B load of canola is worth about $25,000. A load of red lentils has a value of about $30,000 and a load of yellow mustard is worth a staggering $50,000. Locking bins has limited value. Someone who can arrange a truck and auger can also arrange bolt cutters. If your farm home is right beside your bins, that gives a measure of security, but few people are home all the time. Plus, there are bins scattered around the countryside with no one nearby. In the current environment, grain confetti is likely to be popular. A google search turns up a company in Rosenort, Manitoba called Country Graphics that is producing a product called Cropgard. The tiny squares of newsprint with code numbers are mixed into the grain. A five-pound package costs about $70 and the company says the five pounds can be used to mark about 50,000 bushels of grain. The company’s website is www.country-graphics.com. If there are other companies with similar products, please let me know. Perhaps a producer could get their name and/or phone number printed on little pieces of paper to make their own grain identifier. Without some method of protection, grain is certainly at risk given current prices. I’m Kevin Hursh.

February 21, 2008

Carbon credit market strengthens
Carbon credit prices have been rising on the Chicago Climate Exchange. The Chicago Climate Exchange is a voluntary greenhouse gas credit market. It has seen prices go from under $2 in November and December to over $4.50 per carbon financial instrument. The carbon financial instrument is the exchange’s unit for one tonne of carbon dioxide. Volumes have increased strongly as well with January and February setting records. On February 11 alone 2.4 million tonnes was traded. This is more than the average monthly volume in 2007. Analysts credit the increased volume and increased price to U.S. political developments. The carbon price increased after “super Tuesday,” in which Arizona Senator John McCain pulled ahead of rivals for the Republican nomination. Analysts believe that any of the three remaining contenders for the American presidency would cap carbon emissions and bring in a trading system. Thousands of producers in Western Canada who practice direct seeding and minimum tillage have signed up their carbon credits with C-Green Aggregators based in Regina. Those credits are being sold on the Chicago Climate Exchange, so the price increase is good news. I’m Kevin Hursh.

February 20, 2008

Railway revenue cap chopped by the CTA
Most input costs continue to increase, particularly fertilizer costs. However, there is one cost that should decline a bit – grain freight rates. It’s been a long and involved process but the Canadian Transportation Agency has finally announced a reduction to the grain revenue cap for the two major railways. Maintenance costs on the government owned railway hopper cars are embedded in the revenue cap. Back in 2004-05 it was determined that hopper car maintenance costs had declined over the years. Rather than nearly $4,400 per car, actual costs are less than $1,400 per car. The difference represents a $72.2 million reduction to revenue caps in this current crop year. That translates into $2.59 per tonne based on this year’s expected movement. It isn’t clear from the Canadian Transportation Agency announcement how the railways are going to account for the revenue cap adjustment when they’re already more than half way through the crop year, but presumably rates should drop. While the adjustment is a once-only process, the impact should begin this crop year and carry forward into future years. A $72 million adjustment is small compared to total rail costs in a year, but every little bit helps. I’m Kevin Hursh.

February 19, 2008

Surprising statistics on livestock numbers
Not surprisingly, cattle and hog numbers are dropping in Canada. What is surprising is that the drop hasn’t been larger. Statistics Canada has released its livestock inventory estimate for January 1. The total number of cattle and calves on Canadian farms was 13.9 million, down only 1.5 per cent from a year earlier. The number in Saskatchewan hardly dropped at all. Much of the national decline was in feeding operations. With all the herd dispersals you hear about and with poor returns for both cow-calf producers and feedlot operators, it’s surprising the drop in inventory hasn’t been larger. Statistics Canada says Canadian hogs totaled 14 million on January 1, a decline of 5.4 per cent from a year earlier. A lot of hog operations closed down last year. As well, hogs are being exported to the U.S. at a record pace. Like the cattle numbers, it’s surprising that the hog inventory isn’t dropping more rapidly. The statistics also show a 6 per cent drop in sheep numbers. The total Canadian inventory has fallen to 825,000 head. Returns in the sheep industry have been good. It would have been logical to see those numbers increase. Statistics Canada should have the most accurate estimates available, but this latest report may raise a few eyebrows. I’m Kevin Hursh.

February 15, 2008

Prepare for the inevitable downturn
Don’t expect the good times to last forever. Expand incrementally, but keep your backside covered. That advice comes from Dr. David Kohl, a well known and well travelled American agricultural economist. Kohl spoke this week at the Saskatchewan Soil Conservation Association annual conference in Regina. I heard him speak at a meeting the next day in Yorkton. Some analysts make it sound like the good times are here to stay in the grain sector. David Kohl isn’t so sure. He agrees that the next couple of years look pretty good, but overall he believes the peaks are going to be higher, the valleys are going to be lower and the risk is going to be higher than ever. According to Kohl, farms need to have strong balance sheets and liquidity reserves to survive the tough times. Working capital is critical so that you can take advantage of opportunities as they come along. One of the biggest threats to the world economy and therefore to agriculture is the health of the American economy. Kohl points out that his home country has a federal debt of $9 trillion and growing. When our neighbour to the south has the flu, it’s difficult for Canada not to at least catch a cold. I’m Kevin Hursh.

February 14, 2008

Forget the politics - just give me a malting barley price
I hope that more malting barley selectors decide to participate in the Canadian Wheat Board’s CashPlus program. Canadian Wheat Board directors and agriculture minister Gerry Ritz are at an impasse over barley marketing. What was Ritz expecting? He isn’t prepared to accept anything less than an open market, but a majority of CWB directors were elected as central desk supporters. Ritz’s threat to introduce legislation to open the barley market rings a bit hollow. The Conservatives could have done that long before now. If there isn’t an election call and if Ritz can get legislation passed, the barley market will open. It’s far from a sure thing. In the meantime, as a producer, I’d like to be able to consider the CashPlus program. Reports indicate that the Canadian subsidiary of Anheuser-Busch has become the first to use CashPlus on a limited tonnage. Producers were able to sign up new crop malting barley in the $6.50 to $6.75 a bushel range. It’s a three way deal with producers, the CWB and the malting company. Other malt barley selectors haven’t agreed to use CashPlus. They’ve been hoping for an end to the board’s control over barley. With an open market now far from a certainty, it would be nice to see what CashPlus can offer. I’m Kevin Hursh.

February 13, 2008

Extreme volatility in wheat markets
There is unprecedented volatility in American wheat futures these days. American exchanges have responded to market pressures and have widened the trading band for wheat. Rather than a maximum move of 30 cents up or down in a day, wheat can now move 60 cents. Analysts say that increasing the trading band also raises the margin requirements for anyone using the futures. That, in itself can scare some participants out of the market and put downward pressure on prices. After roaring upwards last week, most wheat futures saw big moves down yesterday. Prices are still at unprecedented levels, but no one seems sure where they will go from here. The Canadian Wheat Board has suspended its Basis Payment Contract lock-ins for the 2008-09 crop year citing the extreme market volatility and expanded trading limits. The CWB is going to be under a lot of pressure to quickly reinstate contracting so that western Canadian producers have a mechanism to lock-in new crop prices. The prices for most grains, oilseeds and specialty crops have been on a steep ascent. It can’t last forever, but no one has had much luck to date in trying to predict the top. I’m Kevin Hursh.

February 12, 2008

KVD will end in August
Agriculture minister Gerry Ritz has been saying it for some time, but yesterday he made it official. Kernel visual distinquishability will be removed for all classes of western Canadian wheat at the beginning of the new crop year on August 1. The industry has been working towards an August 1, 2010 removal of KVD for the major classes of wheat saying time was needed to develop the necessary scientific tests to quickly differentiate one class of wheat from another. Ritz obviously believes that some sort of declaration system in grain transactions can replace the need for KVD. Wheat breeders will be happy to no longer be shackled by kernel shape and appearance. The Western Canadian Wheat Growers Association has issued a news release congratulating Ritz on the move and so has the Canadian Cattlemen’s Association. Their belief is that with the elimination of KVD, new high yielding varieties suitable for feed and biofuels will be registered. Those who wanted to move more slowly on KVD have been largely silent. Is the integrity of our wheat exports at risk without the KVD system? Some grain handlers believe it is, but others point out that Canada is the only country using a KVD system to keep different wheat classes separate. I’m Kevin Hursh.

February 11, 2008

Saskatchewan will lead the nation in farm income
The farm income picture for 2008 is brighter in Saskatchewan than any other province. Agriculture and Agri-Food Canada in collaboration with the provinces and Statistics Canada has come out with a forecast of farm income levels for the year ahead. Realized net income in Saskatchewan is projected to hit $1.3 billion. That’s far more than any other province. In fact, it’s more than half of the realized net farm income expected for the entire nation. Not since the boom years in the early 70s has the Saskatchewan number been higher. From 2002 to 2006, Saskatchewan’s realized net farm income averaged a mere $223 million. For 2007, it jumped to over $900 million. Even though input costs continue to rise, the strength in grain prices has produced this year’s projection of $1.3 billion. In other provinces, the overall farm income stats are much more dramatically affected by the poor returns from cattle and hogs. Saskatchewan and Manitoba are the only two provinces where this year’s realized net farm income is expected to exceed government program payments. In Manitoba, the two numbers are very close. In Saskatchewan, program payments are expected to drop dramatically this year to $750 million meaning that the realized net farm income should tower over program payment levels. I’m Kevin Hursh.

February 8, 2008

Notes of optimism in a tough beef industry
These are tough times in the beef industry, but nearly 300 people attended the Saskatchewan Beef and Forage Symposium held the past couple days in Saskatoon. One of the presenters was beef economist Sandy Russell of Saskatchewan Agriculture. She estimates that current returns for cow-calf producers are $20 to $75 a head less than cash costs. For feedlots, current losses are in the $180 to $200 a head range. If you account for fixed costs, the numbers are a lot worse. Canadian beef cow numbers swelled during the BSE years as producers delayed culling older cows. Cow numbers are now coming down sharply. While there’s no way to accurately predict when livestock returns will finally overcome high feed grain prices and the strong Canadian dollar, there are some notes of optimism. As Sandy Russell points out, if you have cattle in Canada right now, Saskatchewan is the place to have them. Our feed grain and land prices are lower making us the lowest cost production region. Another positive is that Western Canada has regained some of its feed cost advantage as compared to the U.S. Although barley is over $4 a bushel, American corn has increased more rapidly than barley in the last while. I’m Kevin Hursh.

February 7, 2008

Ridley pays $6 million to BSE trust fund
There was a blizzard of news and viewpoints that surrounded the BSE crisis, so beef producers can be forgiven if they’ve forgotten about the attempts to launch a class action lawsuit against feed manufacturer Ridley Inc. and the Government of Canada. Class actions are being attempted in Alberta, Saskatchewan and Ontario. A class action has been authorized to proceed in Quebec, but hasn’t gone anywhere yet. However, there has been an interesting development. Ridley Inc. has reached a settlement agreement with the plaintiffs. The feed company will pay $6 million into a plaintiff’s settlement fund, so that it doesn’t have to continue battling the issue in the court system. Ridley isn’t admitting any liability, but it will consent to the certification of the class actions. There’s been no word from the plaintiffs on whether they’ll distribute the $6 million to cattle producers or whether they can use it to continue their BSE liability battle against the federal government. Distributed among all the cattle producers in the four provinces, $6 million wouldn’t add up to much. However, it would pay quite a few legal bills. This almost forgotten legal action may have a new life. I’m Kevin Hursh.

February 6, 2008

Grain prices just keep improving
Holding out for higher prices has been handsomely rewarded in the grain market this year. Yesterday the May futures contract for canola closed at $620 a tonne and many analysts are saying canola could continue to go even higher. Lots of canola was sold at $100 and even $200 a tonne less than the current price. The situation is the same for other commodities. Producers who priced peas at $7, $8 and even $9 a bushel wish they’d have waited for the current prices which are in the $10 range. New crop pea contracts are available at over $8 a bushel. Is that a good deal or will it get even sweeter? Red lentils have surprised many analysts and are now over 30 cents a pound – a record high. New crop red lentils have improved to the 24 cent range. Some buyers are paying over 29 cents for No. 1 large green lentils and the new crop price is over 25. Contracts are available at an amazing 45 cents a pound for new crop yellow mustard. According to conventional wisdom, if you get a good price, you shouldn’t worry if the market goes even higher, but you can miss a lot of potential income by pulling the trigger too early. Of course, you can also lose big by getting too greedy. Prices can fall much faster than they went up. So far though, the amazingly bullish run continues. I’m Kevin Hursh

February 5, 2008

Acreage and price forecasts
The Market Analysis Division of Agriculture and Agri-Food Canada has come out with supply and demand estimates for all the major grains, oilseeds and specialty crops for the 2008-09 crop year. Price forecasts are also included. Based on relative returns for the various crops, Ag Canada expects a 30 per cent increase in durum acreage. The price is forecast to fall by more than $3.50 a bushel, but this would still be the second highest durum price ever and Ag Canada is predicting a large premium over the price of spring wheat. Flax acres are expected to increase by 37 per cent, but the price is expected to drop only marginally. Mustard acres are expected to climb by 30 per cent, but prices are forecast to remain stable. Both lentils and canaryseed are expected to see acreage increases of 10 per cent and for both of these crops the average price is expected to increase due to low stocks. Field pea acres are expected to be up 10 per cent with prices dropping somewhat. Canola acreage is expected to increase marginally with prices dropping slightly. Barley acres are forecast to be relatively unchanged with both malt and feed barley prices dropping a bit. Acreage drops are expected in spring wheat and oats and those prices are expected to be lower. In fact, if the projection is correct spring wheat prices will be sharply lower, although still strong from a historical perspective. The full market outlook bulletin should soon be posted on the Agriculture Canada website. I’m Kevin Hursh.

February 4, 2008

Outside investment in canola production
Profitability attracts money. Pike Management Group based in Alberta has launched a new company called AgStream Inc. AgStream is seeking private and institutional investors and the money will be used to joint venture with farmers on canola production. Pike Management Group is a farm business and market advisory service with over 120 farmer clients across Western Canada. Most are large operations and many of them are rapidly expanding making access to operating capital a big concern. To understand how the joint venture works, take for example a participating Pike Management Group farmer member with a three-year average canola yield of 35 bushels per acre. The variable and fixed costs to grow the crop, including a 15 to 20 per cent allowance for return on investment for the producer, are assumed to be $300 an acre. In a 50/50 joint venture with AgStream, the producer would receive $150 in cash for each acre of canola grown on the farm. For its contribution, AgStream would get half of the canola produced. Any canola above the average of 35 bushels per acre would be divided with three-quarters going to the producer and one-quarter going to AgStream. AgStream is aiming to raise about $20 million to invest in over 100,000 acres of canola production this year, and that will make AgStream the largest canola producer in the country. I’m Kevin Hursh.

February 1, 2008

Feds turn a blind eye to pork industry crisis
Saskatchewan Agrivision has distributed a news release calling on the federal and provincial governments to do more to help salvage the pork industry. Pork producers have been unable to garner much attention nationally or provincially, but as Saskatchewan Agrivision points out, the industry is nearing collapse. The ongoing losses are causing a major restructuring. Agrivision has been a leading proponent of a stronger livestock sector in Saskatchewan and that’s still the correct long term approach. Saskatchewan is unique in its lopsided dependence on grain. We’re one of the few jurisdictions with a net surplus of feed grain – a surplus we normally export at low prices while paying high transportation costs. While pork producers face more heavy losses in the months ahead, the medium and long term outlook is far more positive. As Agrivision points out, the leap in the middle class in Asia is expected to double the demand for meat by 2020. To take advantage of future opportunities it’s good policy to help producers survive until prices turn around. The Canadian Pork Council has repeatedly asked for a short term loan program and improvements to CAIS. Those reasonable requests have been all but ignored by the federal government. I’m Kevin Hursh.

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