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All Things Considered: May 2007

Turned Upside Down


January 11, 2008
By Jim Knisley


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Turned Upside Down.  The mantra was to move from grain to value added, which many took to mean feeding livestock

The federal farm program announced with such fanfare back in March will – are you ready for this – keep 2007 national realized net farm incomes pretty much in the same place they were in 2006.

The $400 million targeted at offsetting rising costs could raise realized net farm incomes from $1.477 billion forecast by Agriculture and Agri-Food Canada earlier this year to $1.877 billion. This is up from $1.7 billion in 2006, but a further jump in energy prices (which we already experienced this spring) or smaller than expected crops or tightening of fertilizer supplies could easily wipe out the gain.

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The money also won’t come close to covering off the forecast increase in production costs. They are expected to rise to $32.7 billion in 2007 from $31.6 billion in 2006.

Nationwide crop receipts are forecast to rise 14 per cent, livestock receipts are forecast to be down two per cent, operating expenses are slated to rise four per cent while payments from government programs were expected to drop 17 per cent. With the $400 million added on, program payments will only drop seven per cent.

Province by province the picture is very strange.

In the forecast, grain heavy Saskatchewan was forecast to see a 30 per cent rise in realized net income this year. With the additional federal money the picture should be a bit brighter.

Meanwhile, Alberta’s realized net farm income was forecast to remain unchanged while British Columbia’s falls 69 per cent and Quebec’s falls 63 per cent. Ontario, meanwhile, is off the charts.

The problem for Ontario is the realized net income last year came in at negative $14 million and was expected to deteriorate further to negative $200 million. You can’t calculate a percentage decrease when you are working with nothing but negative numbers.
If Ontario agriculture was to move into the black this year, it would have to receive fully half of the $400 million in immediate funding.

Ontario agriculture is being hit by rising operating costs and rising grain receipts don’t offset falling livestock receipts.

While operating costs are only up two per cent from 2006 to 2007 they are up seven per cent or $500 million in the last
two years.

Given the forecast it’s not surprising that the federal government chose to unveil its new farm programs near Saskatoon rather than in Prime Minister Harper’s home province of Alberta or Minister Strahl’s home province of B.C. or in Ontario.

Why would any politician want to talk about farm incomes in a place where they aren’t rising (Alberta) let alone somewhere where they are forecast to drop 69 per cent (B.C.) let alone somewhere where all you can see are red numbers. Politically it is much better to pick a place where incomes are recovering (Saskatchewan).

The farm income forecast also reveals that the world of Canadian agriculture is being turned upside down. For a couple of decades the word was diversify, diversify, diversify. The mantra was to move from grain to value added, which many took to mean feeding livestock. Now, the best thing you can do is grow grain and lots of it and let someone else try to figure out how to make money by adding value.

What’s especially interesting is that this picture seems unlikely to change in the near future.

The USDA projects a big jump in corn planting and a drop in soybean acreage. But even if the U.S. gets good weather and a record crop, corn production will still fall 300 million bushels below demand.

The result is that U.S. corn prices, will set record highs. If the weather doesn’t co-operate prices will be even higher.

The USDA also forecasts that for the next 10 years the amount of grain in storage (on Aug. 31) will fall from about 30 days’ supply this year to 19 days’ in 2008, to 18 days’ in 2009 and 16 days’ in 2010.

Ever tightening corn supplies mean rising prices, which are, of course, good for grain producers and bad for users. And this doesn’t only apply to corn. As corn prices rise, grain consumers start looking for alternatives and that will boost demand and raise prices for wheat, barley and even oats.

It also means that any seeding, harvest or production problems will send grain prices soaring and feed, food and fuel (ethanol) prices will be dragged along.

While it is far too early to make the following prediction it is conceivable that in a few years’ time Ottawa and the provinces won’t be talking much about farm programs. They will instead be talking about food programs and how to protect consumers – who have benefited from cheap food in recent years – from double-digit increases in food and ethanol-laced fuel prices. n


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