Megatrends versus Canada’s farms

Can your farm thrive over the next decade?

Global forces are transforming agriculture in this country. It barely takes a second for any farmer to rattle off a list, starting with world population that the UN says will jump by another billion over the next decade and reach 9.6 billion by 2050. Or smartphones that link us to the world from our tractor cabs. Or GM crops that are now so mainstream, we wonder whether we could ever farm without them.

But those are only the start. Sweeping changes will continue to impact Canadian agriculture.

Why should we care? Because eyeing these macrotrends as opportunities and threats for your own business plan is where the big benefits lie.

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If you understand how to apply these trends on a micro-scale specific to your sector or business, they can be game changers.

Country Guide challenged two of the country’s top agricultural economics professors to identify megatrends affecting Canadian farmers. Sylvain Charlebois, associate professor in the college of business and economics at the University of Guelph has a more modern, future-based view of patterns and shifts, focused on food and trade.

As the former executive director for planning and communications for the CWB and professor at the University of Manitoba, Brian Oleson has ridden the roller-coaster through many major changes over the years. He knows megatrends have long cycles, and he has seen how the Canadian grain industry can be fundamentally impacted by global political events.

So buckle up. Here are seven megatrends from Charlebois and Oleson that will shape the future of Canadian agriculture and your farm.

1/Black Swan events

“We have entered a world of complete geo-political instability,” says Oleson. He points to the collapse of the Middle East peace, the increasing number of failed states, and the radical fundamental religious groups wreaking havoc across the globe.

As the world becomes more connected and more linked economically, this means more unpredictability in commodity markets. “Farmers should expect more black swan events,” Oleson says, referring to the theory developed by Nassim Nicholas Taleb in his book, The Black Swan: The Impact Of The Highly Improbable.

“We cannot even conceive of these black swans,” Oleson says.

In the last 20 years, we’ve had our share of earth-shaking, unexpected events, such as the September 11 attacks or, more recently, the Russian invasion of Ukraine. North American agriculture has had its own black swans, including the 1998 collapse of the Asian economy, when prices crashed, or the BSE crisis in 2003 or the current onslaught of avian influenza.

These mostly unexpected events resulted in a lot of structural changes to the Canadian livestock industry. They took some farmers completely out of the game. Many shut down the livestock portion of their farms and switched to crops only, and the change in the sector has been real and permanent.

In short, the hog industry has become an investor-based industrialized commodity.

Cow-calf producers have been better able to manage this risk, says Oleson. If needed, they can keep cattle longer on feed or build up their herds, so they aren’t exposed as much to random events or market swings. The ones who survived and waited for better times are now being rewarded with high feeder and fat cattle prices.

2/Mega, mega dynasty farms

The capital-driven farm family has emerged as the most significant player in Canadian agriculture.

“The family farm will not disappear, says Oleson. “They become a dynasty.”

Oleson likens this group to the large boulders in a barrel. Although there’s more space between the boulders for the smaller operators, most of the barrel is filled with big boulders and they’re getting bigger.

The increase in the investment required to farm today, such as the large efficient precision farming equipment and the skyrocketing price of land, mean larger family farms are able to outbid the smaller, less established farmers.

Smaller farmers are forced to compete with these large operators for limited productive assets, including land. Those large operations simply have more collateral base to buy more land or equipment, and low interest rates have allowed them to leverage their assets and outbid any potential newcomers.

Also, this large capital base means these farms should be able to survive through tough times.

Furthermore they can leverage the heritage and success of the people before them. Of course, there’s always an exception but it’s becoming more difficult to go from a pebble to a boulder. “This will continue,” says Oleson. “The utilization of technology will intensify the consolidation.”

A decade ago, driverless vehicles and drones seemed science fiction. Now, robotic field equipment is on the drawing boards, says Oleson. Will that further enhance the power of these large family farms to expand?

3/Supply management 2.0

Political momentum has favoured trade agreements in the last few years, Charlebois says. Will it still lean in that direction after October?

The opportunities and threats around those trade agreements can and will affect your farm business going forward. “When you are talking politics, you’ve got to talk about food in that,” says Charlebois.

“The EU-Canada trade agreement created a breach in supply management,” says Charlebois. “The TPP (Trans-Pacific Partnership) is the biggest trade deal in history. What’s going to happen with it?”

With Europe recently getting rid of its supply management system, Canada is the only developed economy with a quota and tariff system in dairy. That leaves us in a precarious position, says Charlebois. “I absolutely think there’s a momentum toward a reform.”

What can we learn from Europe? “We can be inspired by Europe but it’s a totally different system,” says Charlebois. “The pricing formula was different. The tariffs were different. Farmers couldn’t use the quota as collateral. There was less fiscal baggage with its system.”

However, the biggest difference was that European farmers had a financial incentive to get rid of the system, while Canadian dairy and poultry farmers want supply management. For example, in Germany, farmers were paying nearly $20 billion a year in fees to keep their system going.

In contrast, Charlebois says he was basically shut down during a recent meeting in his home province of Quebec for even discussing what to do to transition out of supply management.

Instead of burying out heads or reacting with fury, we should create a map to protect our supply management farmers and make changes to enable more trade, before we don’t have a choice, says Charlebois.

There are a lot of ways to do this, he says,  but to make the road out of supply management smoother, farmers need to engage in the discussion of how, and they need to plan for the transition.

Without preparation, the removal of tariffs could be catastrophic to some farmers and the rural economy, especially in Quebec and Ontario. “The EU quota system was newer, with much less fiscal baggage,” says Charlebois. “Given that in Canada, billions (of dollars) in quotas are used as collateral to support farmers who pay very small levies compared to those in the EU, a Canadian-tailored quota-lifting reform would take more than 15 years to implement, at the very least.”

4/Grain cycles

“Over the years, I’ve learned that there are three phases to cycles: the up, the maturity and the down phases,” says Oleson. “These cycles occur once or twice in your lifetime.”

In Oleson’s lifetime, he experienced the Great Russian Grain Robbery of 1972 to 1982 and what he coins the Great Ethanol Robbery from 2006 to 2012-13.

Politics was a willing and erratic partner in both these big grain cycles. The recent price boom was driven by corn-based ethanol. “In 2008, Obama was a major supporter of ethanol and won the ethanol debate in Iowa. In 2012, as energy realities changed, he was the last person in the world to talk about the end of corn-based ethanol,” says Oleson. “The end of his presidency coincides with the end of the cycle.”

Although other factors have played into this grain price cycle, energy vulnerability and homeland security created the dynamics by diverting five billion bushels a year out of  traditional markets.

Combined with the rapidly increasing demand from China, the price of grain shot up with energy. That price cycle is completely spent now, says Oleson. As long as there are no additional capital investments, the established corn ethanol plants will continue to attract four billion to five billion bushels a year. “Corn-based ethanol as a new demand factor is over,” says Oleson. “It’s actually a damper on future price increases as supplies can easily be diverted from fuel to feed and food, if corn prices increase.”

5/ Sticky land prices

Another shift in mentality that Oleson has witnessed in the last few years is that associated with farmland. The wealth created in many areas during this last cycle shifted the thinking around land prices from productive value to land being some place to park your money.

“It’s similar to the logic used on gold,” says Oleson. “Basically, existing farmers, retiring farmers and farmland investors have all turned farmland into gold with a return.”

Now that we’ve gone from massive profits to break-even prices, we need to be aware that the current crop profitability cycle is on the downward slope. This should be reflected in realistic productive asset values.

“Land prices are historically so sticky,” says Oleson. “They’re now more sticky than ever.”

Land prices are probably not going to swing down quickly with commodity prices, Oleson predicts. The large farms will weather the black swan events. They’ll consolidate and become the mega-farm survivors. “They’ll survive and thrive by the big price cycles,” says Oleson. “They will ensure that land prices do not drop significantly, even with commodity price declines like we’ve witnessed in the past two years.”

6/ Focus on ingredients

Over the last decade, a major shift has occurred in how food is perceived by the public. Charlebois says this will increase, and sales will become more attuned to individual buyers instead of the mass market.

“Demand is increasing for more fragmented food,” Charlebois says. “Food is becoming more market driven, more fragmented.”

With that, retailers are calling the shots and more are connecting with farmers to create partnerships to supply specific quality products.

“The food supply chain will narrow,” says Charlebois.

It’s also time for farmer groups and large farmers to become part of the public debate on how food is being grown and handled. Livestock processors and producers need to move toward public transparency.

Processors and producers need to move toward this type of engagement. For example, Cargill’s Better Beef slaughterhouse in Guelph has installed cameras along the line, and Andrew Campbell on Twitter is doing a fantastic job representing the industry, says Charlebois.

Squeezed between retail and farmers is a processing industry dependent on a weak loonie. Having the 80-cent (Canadian) dollar helps, but building an industry on currency is risky, says Charlebois. Instead we need processors to modernize their factories. Processors need to be innovative and create new food choices.

Since 2007, we’ve lost over 150 food-manufacturing plants in Canada. That affects farmers. “If there’s a red light in food, it’s absolutely in manufacturing,” Charlebois says. “Farmers will be directly affected.”

7/Market volatility

Although we have been through a decade of incredible market volatility, Sylvain Charlebois at the University of Guelph says we’ve only seen the beginning.

We’re in for commodity markets bungee jumping with many more factors tugging on the rope. “Farmers need to become better hedgers,” says Charlebois.

On top of hedging market prices, farmers should also mitigate the risks of swinging currency values and climate change, Charlebois believes.

One way to hedge against weather is to buy weather derivatives, which are now a tradable commodity. Weather derivatives cover low-risk, high-probability events, whereas weather insurance covers high-risk, low-probability events. “If you have a bad crop year you can actually use derivatives to offset your losses,” says Charlebois. “It’s not insurance. You buy them in Chicago.”

His perspective and experiences have recently been shifted to encompass Europe. Charlebois is currently a visiting professor at the University of Innsbruck in Austria for one year, with the shockwaves that rippled out of the banking crisis in Greece as just one example of how the world is increasingly interconnected.

We should also be aware of the currency wars being played out in many nations. This past winter foreign exchange markets jumped into turmoil after the Federal Reserve Bank stopped its quantitative easing program. Many governments, Charlebois says, are trying to stimulate their economies and create jobs by devaluing their currency values.

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