Speakers at Canada Grains Council say too many farmers have forgotten that high prices eventually fall
The five-year run of high grain prices is going to end — possibly sooner than later — and those producers who are in denial could be in for a painful reckoning, attendees at the recent Canada Grains Council annual meeting were warned.
“There is a lot of optimism out there and a lot of belief that we’re suddenly bulletproof and we have a new (price) plateau in the grain industry,” said Kevin Hursh, a Saskatchewan farmer and well-known journalist and commentator.
“My crystal ball isn’t any better than yours. But my observation is what goes up comes down… so my message is we all better be cautious.”
The laws of supply and demand haven’t been repealed, added Chuck Penner, president of LeftField Commodity Research.
“I’m not a firm believer that we’re in a new paradigm,” Penner said in his presentation.
There will be a new floor price for crops, partly because of the demand for biofuels, but “it’s certainly not where we are now,” he cautioned.
Grain prices probably would’ve started to fall last year had it not been for a devastating drought in the U.S., Penner said.
And while the ethanol boom — which annually sucks up five billion bushels of American corn (40 per cent of typical production) — has buoyed the entire grain market, the current U.S. renewable fuel standard is not sustainable, he said.
“The U.S. biofuel environment is going to change, no question,” Penner said. “It’s just a matter of time. And when that happens, it will be a big, big impact on the market.”
Moreover, the old saying that “high prices cure high prices” remains as true as ever, he said, noting many areas, including Ukraine and parts of South America, can produce more grain.
While there’s nothing new about price cycles in grain and oilseed markets, farmers need to be reminded of this, he said.
“It seems to me we have short memories,” said Penner. “We’re going to have a new floor but it’s nowhere near where prices are at now. There’s going to be a world of hurt when corn goes back to four bucks and when canola goes back to $8 at some point.”
Prices might not stay that low, but they won’t necessarily return to the current highs and stay there either, he said.
Meanwhile, farmers’ productions costs are increasing, but “most of it is self-inflicted,” Hursh said.
Farmers are bidding up land rent and prices, investing in machinery, while pouring on the pesticides and fertilizer to maximize yield potential.
“And there’s some darn good money being made,” Hursh said. “But along the way we’re pushing up some of our own costs as any market would dictate.”
Land prices have increased but not as fast as they did before the crash in farm income in the 1980s, said Farm Credit Canada economist J.P. Gervais. The inflation-adjusted price for land shot up by twice the amount back then compared to what’s happened since 1995, he said.
“There’s some comfort there in that what we’re seeing now is not totally out of whack with what we’d expect based on what the market says it should be like,” said Gervais.
The demand for land will ease in tandem with higher interest rates and/or lower grain prices, he said.
So, is now the time to bet the farm? Four years ago would’ve been better, Hursh said.
Those who own rather than rent their land can probably survive lower grain prices for a few years, he said. It’ll be tougher for those carrying lot of debt.
“I’m still optimistic long term in agriculture, but I don’t believe it’s going to be quite the easy ride it has been the last few years,” he said.