Canadian grain growers are in unfamiliar territory. Their farms are suddenly profitable. Even stranger, their farms are consistently profitable, mainly due to across-the-board strength in grain prices. And that s only the dizzy start.
Suddenly, all the old economic laws about market cycles look like they were written for some other industry in some other era. The bears aren t just taking a break. They seem to be extinct, and we re assured that the new demand-led market means prices will be stratospheric for decades to come.
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To be sure, there are words of caution. Rmi Lemoine, chief operating officer of Farm Credit Canada paints a challenging, but not impossible, landscape that farmers need to tread carefully while passing through.
Don t be naive and think it s the new reality and it ll never change, Lemoine says. Now is the time to build equity and invest in the future.
That said, Lemoine isn t pessimistic. Debt is higher, but the tools to manage it are better, he says. We shouldn t see a repeat of the past debt troubles. I don t see it going like it did in the 80s.
Even among farmers who are as skeptical an audience as you re likely to find anywhere the evidence of population growth, ethanol demand and the rising global middle class is hard to dismiss.
This effect is even more pronounced because of the dismal economic times the sector endured from the 1980s through the early 2000s. For an entire generation of farmers, it could be tough to downright impossible to pick crops that pencilled out for profitability.
As you might expect, better times have made for a wave of optimism in the grain industry, reinforced by a chorus of financial analysts and investors suddenly interested in agriculture. But within these opportunities, some analysts are also seeing dangers even an echo of the boom-and-bust cycle of the 1970s and 1980s.
In the 1970s a similar commodity boom swept the world. An Arab oil embargo in 1973 caused energy prices to spike, and the entry of the Soviet Union into grain markets as a buyer at roughly the same time drove prices to a new plateau, setting off an explosion of investment on the farm.
But when the boom went kaboom and prices fell below the cost of production, it set the stage for the farm crisis of the 1980s, one of the blackest decades in farm history.
So the question is, is it really different this time? There are plenty of voices saying yes, usually supported with the above litany of population growth, biofuels and middle-class spending.
And, of course, looming in the background is the issue of our production limitations, especially with weather that seems to rock from extreme to extreme. Even in an ideal scenario, it s got to be a tough challenge for the world s farmers to feed nine billion mouths and almost as many automobiles.
It all adds up to a tough environment for grain producers to make business decisions in. How should they invest in their operations to take advantage of these opportunities? How can they balance risk and reward while they do it? And what do they need to know to make the right decisions?
Daryll E. Ray, an agriculture economist based out of the University of Tennessee in Knoxville has been one of the loudest voices counselling farmers to exercise caution. He recently told COUNTRY GUIDE that the farmers he s spoken to about these issues acknowledge there are a lot of balls in the air right now, and trying to predict where they ll all land is causing a lot of trepidation.
I certainly feel their frustration, Ray says. It can be very difficult to understand what s going on right now, especially since I m not sure we have a clear picture as an industry.
For example, Ray says, take a look at the prevailing wisdom that growing demand will drive prices upwards over time. Then take a look at the real numbers. Sure, the dollar value of exports has grown over the past several years, but the volume of total exports hasn t matched that pace.
The International Grains Council s August 2011 Grain Market Report provides a bit of context. It pegs total coarse grain trade in 2007-08 at 240 million tonnes and it estimates the same trade in 2010-11 to have grown to just 243 million tonnes.
The total value of these global grain exports has certainly climbed as prices have risen, Ray says. But the total quantity has actually been very flat.
Add to that equation the reality that many of these developing countries are making huge investments in agriculture research. For example, China is said to have close to 20,000 PhD-level agriculture biotechnology researchers working on increasing agriculture productivity, and their government expects their genetic breakthroughs to contribute 63 per cent of agriculture productivity growth by 2020.
While there are never any guarantees in life or farming, primary research is a numbers game. More researchers means more discoveries, and more grain and oilseed production, Ray says. And that suggests a central flaw in the prediction that we re headed into an era of ever-increasing prices.
We re always looking at the demand side, not the production side of this equation, Ray says. I think that s a mistake. We should look at both.
The story of which side of the equation to believe boils down to a pair of competing world views that can be best summed up as the Two Thomases.
On one side is Thomas Malthus, the 18th century Scottish economist who penned the groundbreaking Essay on the Principle of Population in 1798. To simplify his central idea, Malthus claimed that human population and progress would, ultimately, always remain checked by agricultural productivity, a world view that s now referred to as Malthusian. Population is always poised to grow faster than our ability to feed it. So if we remove disease and other restraints, we will have a guaranteed market for every bushel that farmers can produce, basically from now to eternity.
On the other side is Thomas Edison, inventor extraordinaire. His spirit of discovery and innovation, say proponents, will surely find solutions to production limitations as they arise. They point to the green revolution and biotechnology as just a pair of examples of human potential and its ability to solve these thorny problems. But exactly what will that innovation look like?
Initially it won t look all that much different than today, says Ray. There s still a fair bit of low-hanging fruit in established production areas that haven t yet made the investments to maximize production. One of the most obvious spots is Brazil, where farmers there are industriously converting former pastures to cropland using huge applications of lime to balance the soil pH and make it suitable for annual cropping. Ray says there s the potential for something between 200 million and 300 million acres to be added to the global arable land base in this country alone.
I suspect we ll see their beef industry move closer to the model we re familiar with where animals are fed in feedlots, and that pasture will continue to become cropland, Ray says.
While the details differ, there are also other regions where production could increase just by making investments in proven technology that s already widely used in other parts of the globe. Ukraine, Russia and the collection of former Soviet territories known colloquially as the Stans for example, have long failed to live up to their productive potential, first under the Soviet collective farm model and now under a botched land privatization scheme from the early 90s that saw much of the land broken up into small, uneconomic units.
Then there s the longer-term picture which could see the yield potential of genetically modified crops finally begin to pay off. And that s all fine and good at least in the short to medium term. But over the longer term there are some much larger challenges that need to be grappled with, say others.
THE OTHER SIDE OF THE COIN
Don Flaten, a soil scientist at the University of Manitoba says that at first glance, crop nutrients show the potential to be a major production bottleneck in the future.
We can probably continue to increase agricultural productivity in the short term with improved genetic yield potential and better management of water and nutrients, but there are limits to this, Flaten told COUNTRY GUIDE recently. In many cases our farming systems rely on intensive and increasingly expensive inputs of non-renewable resources such as fuel and fertilizer that are not used very efficiently or recycled very well.
To get some sense of this, consider the two major crop nutrients, nitrogen and phosphate. Nitrogen is almost exclusively manufactured from natural gas. Phosphate comes from rock phosphate mines, which are a finite reserve.
Reserves of both will eventually become exhausted or too expensive for many of the world s end consumers to afford, Flaten said.
That s not to paint an entirely grim picture, however. New technology like fertilizer coatings and inhibitors show great promise in reducing environmental losses of nutrients. Better tools are becoming available for measuring soil nutrient reserves and crop needs, paving the way for more precise applications. Likewise there remains enormous potential to close the nutrient loop and reclaim nutrients from everything from waste food to human sewage.
But that s not necessarily going to translate into peace of mind for the country s grain growers, Flaten concedes. He suggests that volatility both in prices and input costs will be the simple reality going forward.
These economic factors, as well as climate variability, will keep farming as a high-risk venture, Flaten said.
THE ECONOMIC DICE
Then how do farmers make basic business decisions amid such uncertainty? The FCC s Lemoine says it s time for farmers to get strategic in their thinking.
Prepare for the next downturn, whenever it is, Lemoine says.
Investments should include everything from new technology that makes your cropping systems more efficient, to sound business advice that ensures your business is well positioned to withstand theoretical but likely inevitable future shocks.
Among the most important exercises a farm manager can undertake is a stress test that changes some of the variables like crop prices and interest rates.
Crank your interest rates up to seven per cent, and see what happens to your bottom line, Lemoine advises.
While interest rates have hovered near historic lows in recent years, sooner or later they will begin to creep upwards. With many farmers using a variable rate with the option to lock in rates at a later date, being aware of interest rates trends will be very important.
Fortunately, we don t seem to be seeing the dramatic swings that we have in the past, such as in the 1980s, Lemoine says.
Generally Lemoine says he sees farmers as well positioned. They may be using a lot of debt, but they re good at managing it, he explains. They also seem to be making investments that will improve efficiency and productivity in the good times to make their operations more resilient in the long run.
EVERY SO OFTEN
So is the answer boom or bust? To put it bluntly, nobody really knows. Crystal balls are in short supply, there are no psychics out there and the best anyone can do is try to make an informed decision.
FCC s Lemoine says in the end it s all going to come down to sound business management. Well-run businesses will succeed. Others will encounter challenges. Farmers should make sure they re taking a realistic approach to their operations and the sector itself and prepare for the future. If they don t they might not like the results.
It can certainly catch up to you, Lemoine says. In the end, every farmer will make their own decisions based on their businesses, their appetite for risk and the opportunities they see, he says. Just don t get too carried away by the sudden wave of optimism that has swept through the farm community.
Daryll Ray insists that the past can help inform us about the future.
I ve been in this business for close to 50 years now, Ray says. That means I m now into my fourth new era. There was the postwar boom, the boom of the 1970s, a shorter period in the mid-1990s and today. They all sounded the same at the time.
Every so often, says Ray, we enter into a period where we hear that everything is going to be different and it never is. CG
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Prepare for the next downturn, whenever it is.
Rmi Lemoine
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China has graduated 20,000 PhDs and says they ll boost yields more than the Green Revolution
