Farmers Feed Cities, Farmers Fuel Cities: In 2006 and Beyond Which Is It?

If you live in Western Canada you know them well.  If you are in Eastern Canada, you probably don’t know them.  Last week fertilizer producer Agrium reported a record profit of $142 million US in the second quarter of this year.  It was a reminder to me that all is not necessarily doom and gloom in this business.

Mike Wilson, Agrium’s President and CEO was quoted as saying this in a recent Canadian Press article.

“As we look toward 2007, we see strong fundamentals for our retail and wholesale fertilizer businesses.” “The global grain situation is expected to continue to tighten due to the rapid growth in grain use for biofuel, a significant reduction in corn export availability from China and the ever growing demand for high quality food.”

From a farm perspective let’s hope Mr. Wilson is right.  Agrium is obviously doing something very right.  Hopefully his words will translate down to the farm gate.  Its obvious farmers are buying their products.  A little prosperity on the rural concessions would not only further help companies like Agrium but would surely nurture our greater Canadian rural economy.

August 11 will surely give us a few clues on whether Mr. Wilson’s statement regarding a tightening of the global grain situation comes true.  It’s funny.  We get so accustomed to low prices and grain gluts we start to believe better times and tightening grain stocks are what dreams are made of.  When the August 11 report rolls around the question will be whether trend line yields will be realized.  In the corn complex any shaving from trend lines will send markets soaring.

So far that doesn’t seem too likely.  It would seem there will be no 160-bushels/acre yield for US corn.  Even 150 bushels/acre would increase carryover.  I had said earlier that a hot, dry, scintillating drought, which put the US average yield in the 130 or 140’s, would send corn futures soaring.  With part of the American Midwest resembling Grandma’s garden, this may not be the year.  This is where I’m sitting now.  Futures prices should give us some clues this week on what traders are guessing is in the August 11th USDA report.

More corn would seemingly mean more of a grain glut.  However, what Mr. Wilson of Agrium and others within the North American ethanol complex speak about are “demand factors” which might take that glut and burn it away.  Some of that might be Chinese imports of American corn.  However, what everybody likes to talk about is bio-fuels, ethanol, etc.  For some it’s like California, 1849.  Let’s get that gold rush started.

Not so fast.  I recently read an article on DTN written by Todd Neeley regarding the price of ethanol.  The following is a direct quote from that article.

“All indications are the ethanol-price honeymoon is almost over.

Indicators are saying ethanol supplies have caught up with demand since the renewable fuel was pegged to replace the additive MTBE.

Ethanol prices rose to nearly $6 a gallon in some areas of the East Coast this summer, an all-time high in the U.S., but those prices weren’t even $3 a gallon a few days ago.
Brian Milne, editor and product manager for DTN Refined Fuels, said ramped-up ethanol production, improvements in industry efficiencies, the nearing of the end of the peak driving season and the nearly total replacement of MTBE are bound to drive down ethanol prices and possibly gasoline prices.” Unquote.

So what does this mean?  It is almost like, well, “farming.”  The price of ethanol was $6 and now you can hardly get $3 for it.  Add all this refining capacity that is being built both across the US and Canada and what happens to the price of ethanol?  Is there something wrong with this picture?  Are we talking about mothballed ethanol plants before the shine wears off?  Have stranger things happened?

That is almost heresy to muse about in farm country.  However, in many ways we are taking the first steps in both the US and Canada to replace fuels with “bio-fuels”.  With the Israelis and Hezbollah fighting it out in the Middle East, oil markets remain nervous.  This is all good for the political push to replace fuel with “bio-fuel.”  Finding more farm profits within this bio-fuel, ethanol, gasoline, and corn maze will be the challenge.

It is hard to get used to.  We have been nurtured to believe that as farmers we produce food for the non-farming world.  However, now that seems to be changing.  We now are looked at by society as producing food, but also part of an emerging industrial complex.  The challenge for farmers are to seize this moment, re-tool and regroup.  We might not know where we’re headed, but buying into the status quo is perhaps a road to nowhere.