On Feb. 25, 2008, Hard Red Spring wheat peaked at an incredible $24 a bushel on the Minneapolis exchange. “That affected the psyche of the entire grain market,” says Derek Brewin, professor at the University of Manitoba’s department of agribusiness and agricultural economics.
The 2007 to 2008 price rallies set off a wave of farm optimism not seen in decades. Everything from the enrolment in university ag programs to the demand and price for inputs began to soar. “In some cases, land values doubled, and not because of urban influence,” Brewin says. Fertilizer rose into the four-digit range. Average cost of production for wheat has risen over 20 per cent in the last decade.
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The ROA in 2010 doesn’t look as promising as it did in 2008. To pay interest on expensive land and carry an equipment line is going to be difficult with current commodity outlooks, says Brewin. In these revenue conditions, only larger farms with accumulated net assets, including an efficient equipment line, can take on more acres.
In Eastern Canada, average corn prices varied significantly from $2.94 to $4.71 a bushel from 2004 to 2008. Yields were more consistent, averaging 145.6 bushels per acre. However, net farm income was also affected by rapidly rising cost-of-production numbers, from $369 in 2007 to $438 per acre, according to OMAFRA’s 2010 budgets.
Before interest and depreciation, the net margin per acre for grain corn was $132 per acre. However, land values in Canada’s corn-growing areas have reached colossal levels, topping out at over $10,000 an acre in places like Oxford and Perth counties last year, putting more pressure on the ROA performance of Ontario grain production.
Oilseeds
From 2004 to 2008 period, the greatest factor affecting grain and oilseed ROAs in Western Canada has been one word — canola. “The increases in the acres and yields of canola have had a big impact on net farm income,” says Brewin. “When you have yields like we had last year in Manitoba, up to 40 bushels an acre, it affects farms and communities.”
Oilseed production has also increased in Eastern Canada. Soybeans are now the largest crop in Ontario, topping 2.4 million acres, and for good reason, with a five-year average production for soybeans at 40.7 bu./ac., the advent of Roundup Ready and no-till systems, and world demand for premium non-GM food grade beans.
The spread in yields is huge because soybeans are seeded in a wide geographic zone and under many conditions. Horst Bohner, soybean specialist with the Ontario Agriculture Ministry, guesses that yields vary from 25 to 70 bu./ac.
From 2005 to 2009 soybeans have grossed on average about $351 per acre. The cost-of-production numbers are again roughly based on the Ontario government’s field-crop budgets, which are meant as spreadsheets for individual decision-making. The $206-per-acre average cost of production for 2006 to 2010, doesn’t include costs for interest and depreciation.
Long Term
“Yearly returns are shocked by large advances, like the increase in canola, or by new demands coming online, like ethanol,” says Brewin.
Brewin believes the trend isn’t toward massive yield jumps, but how to make older crops use inputs more efficiently and how to find new uses for existing crops. “We’ve come back to looking at operating costs,” he says. “There’s a lot of long-term upside potential.”
Global development of grain-and oilseed-growing areas, like Ukraine or Brazil, won’t match the increased demand from the expanding middle class in developing countries, says Brewin. “With higher income, more people will demand meat.” Livestock takes more grain, which will put pressure on the bottom of the wheat market.
Ethanol demand should also drive corn prices and affect the bottom of the wheat market. The big lesson learned from those peak years was how corn prices drove demand and prices for inputs, especially nitrogen.
Brewin says that since depreciation is not included in net farm income in the federal Farm Financial Survey, the ROA calculations for crop farms seems much better than other sectors. Says Brewin: “Farm equipment, especially anything with a motor, depreciates fast and is a relatively large portion of net worth on a grain farm.”
Is there something to be said for having the strategy of just surviving the tough times and letting your land assets increase over time? “If net farm income is break-even and asset values increase over the same period, you are ahead,” says Brewin.
“I’d like to see the net worth of those supply managed sectors without quota value,” says Brewin. “It likely would be less than the grain sector and there’s a large political risk to that asset.”
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NFI Assets= Roa
Net farm income, as calculated on the Farm Financial Survey, is total revenue minus total expenses. It includes interest payments but not depreciation and government support payments. The rolling five-year average cash net farm income over the five years of the survey varied from nearly $115,000 for poultry and eggs to $8,000 for beef cows, feedlots and backgrounding operations. Average expenditures in rural households in 2008 were $63,248.
For farmers, management opportunities include productivity, technology adaptation, cost control and what to invest in. In the last decade, Canadian agriculture went through a period of widespread consolidation and generally, the total asset value of most Canada’s farms has increased. On the Farm Financial Survey, assets per farm rose from $1.13 million to $1.58 million, and liabilities rose from $236,969 to $301,370 from 2004 to 2008.
However, farmers owning quota or land had a significant increase in asset value between 2004 and 2008, with an overall net worth increase of about 30 per cent in some cases. Furthermore, liabilities or principal payments are not part of the ROA calculation.
“This results in a downward bias on the ROA computation as the market value may be up to double the book value for the average operation,” says John Groenewegen, JRG Consulting Group in Guelph, Ont.
