High Cost Structure On Canadian Farms Is Our Achilles Heel

“Markets have a way of correcting themselves—often in brutal fashion—and they don’t care who get hurt in the process.”  (Dr. George Brinkman, August Canadian Farm Manager)

Think about that one for a moment.  Dr. George Brinkman is a well-known former professor of Agricultural Economics at the University of Guelph.  His writings through the years have been acclaimed in some circles and pillared in others.   George Brinkman was a friend of mine.  However, I’ve lost track of him through the years.  In fact he was on my supervisory committee, which guided me toward a Masters’ Degree in Agriculture Economics.  Nobody does agricultural economics more intuitively than George Brinkman.  What he taught me way back in the day has stayed with me forever.

What most people don’t know about George is he’s not only a great agricultural economist, but also an avid fisherman.  Sometimes I couldn’t tell which was more natural for him, a fisherman or an agricultural economist.  However, back in those days and now I pay attention to what he says.  With the USDA prophesizing about more corn and less ethanol combined with some of our hyped up costs it might be time that we consider what George is saying.  As farmers we surely care who gets hurt when a market turns against us.

To be fair what George is talking about in that quote is debt to income and equity to income ratios in Ontario agriculture versus almost anywhere else.  In a recent edition of the Canadian farm manager George cited a debt to income ratio of 4.3 which Canadian farmers faced in 1981.  That meant it would take 4.3 years of income to pay off a farm’s debt.  However in the period from 1997-2005 that ratio shot up to 15.3, meaning it takes almost forever to pay off Canadian farm debt.  George goes on to talk about how interest rate fluctuations would be more hurtful to Canadian farms than US simply because of the higher debt loads.  It’s a great read if you like to look at our structural debt problem in Canadian agriculture.

From my perspective it’s all true.  Not everything is golden in our Canadian agricultural world.  In a world where “fuel is competing with food” for headlines, we don’t have it quite right here regardless of what the popular press is saying.  I even heard an Ontario farm leader being interviewed today who was talking about letting the good times roll.  Simply put in Canada and Ontario in particular our costs are too high, both fixed and variable.  If this continues unabated the current “biofuel gold rush” apparently raging outside my Canadian farmscape will be short lived.  It would seem in 2007 everybody involved in Canadian agriculture is making heaps of money except Canadian farmers.

Some of you might be thinking, “Has Phil finally lost that brick which has always made him one brick short of a load?”  Or is his vision becoming blurry as he ponders the next six weeks in a combine cab?  Hmmmmmm.  I don’t think so.  In my mind if I could have ordered in 2005 $8 wheat, $9 soybeans and $3.50 corn for 2007 I’d take it.  However, its pretty clear to me our costs have risen so significantly we’re entering a new cost era which is not sustainable.  Add George’s musings about higher land costs to say nothing about quota and we’ve got a new problem.  Right now it should be all about “cost control.”

For Canadian producers we aren’t sharing in the new agricultural wealth like our American cousins.  However the “hype” of what’s going on down there is just as real in Canadian farm country.  One of the differences is basis levels for grain.  Futures markets measure price levels in Chicago outward into the future.  However, basis levels measure what Canadian end users pay for grain.  With our Canadian dollar currently challenging 97 cents US, it’s made our net revenues lower than would be expected at elevated futures levels.  Even more importantly, its made potential future revenue gains unlikely.

Last month many of you know I visited a 12,000 acre seed corn farm near Howe Indiana.  Listening to the farmer owner was a bit like listening to a movie star.  I hung on ever word.  This man had no limits.  However one thing that stuck with me was this.  He said forget about “our (US) dependence on foreign oil, how about our (his) dependence on foreign fertilizer?”  He went on to talk about fertilizer costs, which he considers untenable for the future of his 12,000-acre seed corn farm.

The question I have is where does that leave me with my 830 acres or anybody else in the Ontario countryside?  In my small mind I’ve got the same problem and I’m tired of pretending I don’t.  Ditto for those of you in Alberta, Saskatchewan, Manitoba and Quebec.

The point being agricultural prices are cyclical at the best of times, which many people consider to be 2007.  Last week USDA came out and raised the corn crop estimate to 13.3 billion bushels.  At the same time they lowered ethanol usage.  Meanwhile ethanol prices remain quite low, the December contract down to $1.58/gallon last week.

What’s this mean?  The day of the report corn jumped 15 cents only to retreat 9 cents the next day.  However, disregarding the non-commercial shenanigans for a minute it means that the “demand factor” within this corn market is “drying up”.  Stocks of corn are growing.  If it weren’t for wheat being on testosterone, we’d be at much lower futures values.

All of this goes against almost everything we’ve heard over the last year of the ethanol gold rush.  Nonetheless, we’re kidding ourselves if we can’t control our costs.  Triple stacked hybrids need fertilizer with increasingly triple stacked costs.  This translates into higher capital costs with no thread of a revenue stream to keep up with it.  We don’t have that subsidy theme park like they have down south.

So what’s the future?  Increasingly based on the real fundamentals within the grain market I think the ethanol party is hitting the skids.  Our loonie continues to hurt Canadian farmers and those onerous costs are killing our bottom line.  There are answers to it, with technology being one.  However, the first line of defense against high costs on Canadian farms lies within us.  Making that choice is job one heading into 2008 and beyond.