It wasn’t so long ago that the talk at farm meetings was of how everything was different this time.
Demand would never fade. The emerging middle classes of the world’s developing nations were hungry and they were ready to pay. Plus, as if that wasn’t enough, new government policies in favour of biofuels had shot grain prices up into the stratosphere, a trend that was reinforced by a series of production shocks in critical grain-producing regions around the globe.
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A July 20, 2012 report from the Reuters news service, written as the U.S. Midwest baked under drought conditions, showed Chicago Board of Trade nearby futures contracts setting new high-water prices in key crops. Corn for September delivery hit $8.16 a bushel (all prices U.S. $) and soy for August delivery was at $17.49 a bushel — both all-time records. Wheat also saw a bump, up to $9.35 a bushel, a four-year high only eclipsed by the prices at the peak of the 2008 food crisis.
Just 12 months later, the picture had changed entirely. Headlines in the farm press fretted that the bumper crop of 2013, especially on the Canadian Prairies, was pressuring prices downward.
This winter, the mood at farm shows was different again. Manitoba Agriculture, Food and Rural Development unveiled its annual cost-of-production estimates at Ag Days in Brandon in January and our sister publication, the Manitoba Co-operator, reported the grim news in the headline “Few money-making crops projected for 2014.”
Winter wheat planted the previous season in 2014 would earn a grower a margin of $95 an acre in the wetter eastern half of the province and just $46.45 in the drier western region. Eastern growers might also eke out $5.71 an acre with specialty canola.
Everything else was predicted to be a money-losing proposition or, in the best-case scenario, to be “near break-even.”
All in all, it’s a far less rosy picture, concedes one farm business management specialist with the Saskatchewan Ministry of Agriculture. Val Panko says the numbers for her province were similarly discouraging, a trend grain growers around the world find themselves grappling with as better growing conditions see supply meeting demand again.
As long as this continues, farmers are back to having to produce as efficiently as possible, waiting for prices to rebound, Panko says.
“Cost containment becomes much more important,” Panko adds. “Marketing is also a huge part of the equation.”
It all boils down to an approach she and other farm business management specialists have advocated for decades now: having an intimate understanding of your farm’s cost of production and then executing a sales plan based on those numbers.
“We’ve been talking about this for a long time, but I’m still surprised by the sheer number of farmers I meet who don’t know their cost of production,” Panko says.
In part that might be due to the difficulty in assembling the numbers. Then there’s the question of applying meaningful analysis to them, for example benchmarking them against similar farm operations to see how you stack up. Panko says there are some business development programs available to farmers that would help fund a consultant to do some of this nitty-gritty detail work.
“It does require doing research, and looking very closely at your operation,” Panko says. “If it were easy, everyone would be doing it.”
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Assembling, analyzing and benchmarking those numbers can reveal important information about a farm, Panko says. For example, a cost of production higher than similar farm operations will undermine that farm’s viability over time, so it must be addressed. A cost of production lower than other farms gives that operation more opportunities to find profitable prices — which leads to the second and equally important part of this equation, Panko says.
“You really can’t talk about cost of production without then talking about marketing,” she says. “The two really do go hand in hand.”
Once those numbers are in hand, it gets easier to set and execute a marketing plan that can bring a farm to profitability even during challenging times, although of course nobody knows how markets will move into the future, or what the longer-term trends will be, and prolonged downturns will be challenging to almost every farmer.
On the farm level it’s causing growers to pencil long and hard, and to look for areas where they can trim fat without hitting muscle or bone, or make decisions that can keep productions costs lower over time, be that the next season, or the next few. Lynn Jacobson, the head of the Alberta Federation of Agriculture, who farms near Enchant, Alta., says farmers saw the writing on the wall last fall and started adjusting their plans almost immediately.
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Input costs were among the first items to fall under heavier scrutiny, Jacobson says. That doesn’t necessarily mean cutting out key inputs but rather looking for the lowest prices possible instead, say, of taking things from the local outlet because it’s convenient. He says his operation purchased its fertilizer last fall, when nitrogen was around $500 a tonne, versus $700 when he spoke to Country Guide early this spring.
“That’s a decent savings right there,” Jacobson says.
Also many producers will be exploring ways to minimize their equipment costs, but with so many already zero tilling, the low-hanging fruit has already been picked. It does likely mean a bit of a moratorium on major capital investments like new tractors or combines.
Crop protection costs are also going to cause people to explore options like bringing in lower-cost chemical from the U.S., Jacobson adds, citing the case of one popular fungicide that sold for dramatically less in the U.S. market.
“It’s six times more expensive on this side of the border,” Jacobson says. “I think those sorts of price differences are going to cause farmers to look at using things like the GROU (pronounced ‘grow’) program to import their own.”
This has been made easier by the role of broker organizations that handle the logistics on behalf of farmers. Jacobson cites Farmers of North America as an example, but stresses he’s not promoting any one organization, but acknowledging they blazed the trail, and once a road is built, anyone can travel on it. More companies are likely now going to be willing to pursue this strategy, making it more difficult over the long term for chemical producers to do price discrimination based on the U.S.-Canada border. In his role as head of the Alberta Federation of Agriculture, Jacobson says farm groups like his will be working hard on this file.
“How well this works will depend a lot on government, and we’ll definitely be pressuring them to make it possible,” Jacobson says.
Another option he’s heard of farmers exploring is cutting crop protection costs using newer and more efficient nozzle designs. It’s not supported by the chemical companies, he says, but farmers are dropping rates by as much as half and still seem to be reporting good coverage, he says.
“You could save $10 or $15 an acre using the air induction nozzles and lowering rates,” Jacobson says. “Basically farmers are going to be looking everywhere they can to save a dollar. That’s what happens when you’re farming at or just below the cost of production.”
This new austerity isn’t likely to stop with the farm books either.
“It will even come down to personal expenditures, with people spending only what they have to,” says Jacobson.
Other than that it’s just going to come down to having a marketing plan and working it, Jacobson says. Learn your cost of production, be ready to do things like lock in a positive basis and basically exploit any opportunities that might tip you into the black on the balance sheet.
Jacobson also says he expects to see a lot of interest in non-traditional crops. Oilseeds will hang in and perhaps even grow, but wheat will likely fall. Other crops like grass seed, alfalfa seed and even hemp might look more attractive in a lower price environment.
“We planted a field of alfalfa for seed and I’m thinking maybe I should plant another quarter,” Jacobson says.
The bottom line is that farmers are going to be out looking for options. This is likely to encourage a wave of innovation, and some of that innovation might involve seeking out market opportunities on their own.
“I was on a Cigi course recently, and was talking to someone from Morocco who was interested in contracting directly with farmers,” Jacobson says. “You might have to load shipping containers on your farm to take advantage of something like that, but shipping containers also seem to move before bulk grain shipments.”
Back on the eastern Prairies, Jim Pallister, of Portage la Prairie, concedes the numbers are getting tougher, but insists it’s still a world full of at least as much opportunity as danger. He suggests that one of the key concerns of the smart young farm manager during this period of lower prices will be cutting costs while not cutting corners.
In other words the goal is to maximize production and spread fixed costs as far as possible, while not overspending to chase diminishing returns.
“The idea is to be lean and mean, but still maintain yields,” Pallister says. “That’s the only way you’re going to keep your cost per bushel or cost per pound down.”
That could prove to be a challenge for the most recent entrants to the business, since anyone who has come in during the past five years has only experienced boom times. Pallister says you can see the exuberance in the enrolment numbers at the University of Manitoba’s agriculture diploma program, which he graduated from in the 1970s. Those numbers tend to track the fortunes of the larger industry very closely, he says.
“In the 1970s when I graduated, the graduating class sizes were between 120 and 125 students, when one of my sons graduated in 2004, it was down to around 40 students. Today I understand it’s back up to over 120 students,” Pallister says.
That means an era where almost nothing pencils out profitably is going to come as a rather rude wake-up call for some of these freshly minted farmers — but the best will rise to the top and see opportunities to be siezed rather than an endless landscape of hopeless numbers, Pallister says.
For example, one opportunity may be found in embracing the next wave of innovation, Pallister says, noting that other breakthroughs such as zero till really came into their own during the challenging economic times of the 1980s and ’90s, when necessity forced growers to find solutions to the problem of high costs and low prices. One area he highlights is embracing new precision agriculture tools to contain costs while keeping total production numbers up.
“I found an old binder in the office this winter that had a bunch of information on zone management in it,” Pallister says. “I’ve been reading about this system since 1999, and I think the industry is still really getting its head around it. It’s the younger farm managers that really understand this technology and will drive it forward.”
Pallister notes that each successive generation on Prairie farms has its own unique challenges that they must rise to in order to succeed. For his father’s generation it was embracing mechanization. His generation really perfected Green Revolution agronomy systems based on fertility and crop protection tools, as well as the first wave of biotech. This generation will see its own windows of opportunity, he insists.
“For this generation, it’s the IT stuff — that’s their window,” Pallister says. “It’s going to be up to hard work and this is going to take some serious mental effort, but I’m quite certain the opportunities are there, if they’re prepared to work. Work isn’t throwing 100-pound bales and bags of seed anymore — this is mental work now.”
One opportunity to put conditions to work for you on your farm can be found in managing interest rate risk, Pallister says, highlighting that the issue touches down heavily in both the production and financial management side of the business.
We’re currently living through a period of historically low interest rates that have lasted longer than anyone ever could have predicted. That has provided some great opportunities to invest in farms across the country. It has also contributed, along with high grain prices, to a wave of optimism across Canadian farms. Unfortunately, it’s also bred more than a little complacency, says Pallister, and it’s a deadly risk known first hand by farmers who carried debt at rates in the high teens through the 1980s.
Simply put, he believes it’s a mistake to assume rates are going to stay this low, and farm managers should be looking for opportunities to lock in interest rates for as long as possible. In itself, that may hardly be a dramatic statement, but Pallister takes it one step further. He suggests managers should be paying off the principal slowly, to take advantage of the rate differential he’s predicting will emerge in the coming years.
Using round numbers, he says take a $10,000 loan, and lock it in at four per cent over 10 years. For many the desire would be to pay off the principal as quickly and completely as possible — but that would negate the protection at the far end of the loan term. Better to treat it as a mortgage, where the length of the term and the period of amortization are two different things.
“If you had that loan and you paid it off over 10 years, your lender would probably really like you,” he says. “But I say you should pay that principal off slowly and put that cheap money to work on your farm. By actually maintaining a balance, you maintain your interest rate protection.”
So, for example, rather than paying $1,000 a year on the principal, and having a zero balance, it might be wiser to pay $500 a year, and still have a $5,000 principal owing at the end of the term. In an ideal world, you’ve either invested the difference in places that yield more than your low interest rate, or you’ve been using it to prevent your operation from having to borrow at higher rates.
“That’s how you can put these low rates to work for you,” Pallister says.
Val Panko says it’s going to be interesting watching how farmers rise to these challenges, and she agrees that similar periods have had a transformation effect on the industry in past, such as the rise of canola.
“It wasn’t that long ago that you never saw canola south of the No. 1 highway — now it seems like that’s all you see,” Panko says.
One of the most obvious transformations is already happening — a move to corn and soybean production in parts of the region. Other smaller-acre crops are beginning to garner attention too — everything from quinoa to hemp.
“It really isn’t possible to say what the next big thing may be,” Panko says. “But I do think farmers have already started looking for it.”
