Saskatchewan, Canada, posted March 15, 2007: Recent
farm income projections from Statistics Canada illustrate
the potential profits and pitfalls for farmers from the ongoing
expansion of the biofuels industry.
According to the government agency, when all the calculations
are finished, realized net farm income for Canadian farmers
in 2006 will be lower than in 2005. Even lower incomes are
forecast for 2007.
However, the pain will not be evenly spread. After being
a basket case for years, Saskatchewan will lead the country
in realized net farm income in 2006 and 2007, due to higher
crop prices. Ontario, Quebec and Manitoba will suffer, in
large part because of falling returns from hogs as feed and
input prices continue to escalate.
The increase in crop prices is the reason for the good news
in Saskatchewan. This is being driven by crop failures in
some major exporting countries and a continuing draw down
of world grain stocks. It is being impacted even more by the
rapidly expanding global ethanol industry. Corn in the fuel
of choice for ethanol production, and corn acres are projected
to increase substantially in the U.S. this year. This will
take acres away from crops like wheat and soybeans, and will
propel prices for these upward.
Feed grain prices in western Canada, particularly barley,
are being driven up as well, as demand for feed grains is
good, production was low last year, and American corn is an
Declines all around
The downside of the ethanol boom is also huge, especially
in the short term. Rising feed grain prices have chased the
price of hogs and cattle downward. Falling hog prices are
hitting Manitoba, Quebec and Ontario hard. Alberta and Saskatchewan
farmers have suffered from calf prices that make one pine
for the bad old days of BSE. These are expected to decline
further next year, as are hog prices.
If you look at the predictions and projections, ethanol and
biodiesel production have nowhere to go but up. This will
squeeze livestock producers even further as feed costs are
passed down the line to the primary producer, the only one
with no choice but to bear them.
Nor will the impact end there. Cow-calf producers are living
on the edge right now. Calf prices had only begun to rebound
from BSE when they were hit by the feed grain price lunge.
Cull cows and bulls still contribute nothing to income, despite
a large increase in Canadian demand for the meat they yield.
Most cattle herds on the prairies are small, averaging 60
or 70 cows. They are usually part of a mixed farm, which also
grows substantial amounts of grain.
Higher grain prices could lead to many of these producers
getting out of cattle. Much land was seeded to perennial forages
in the past decade, as a result of low grain prices. Undoubtedly,
much of this will again be cropped annually.
This scenario is not good news for Saskatchewan, which has
put some effort into promoting greater livestock production.
It may also not be such good news for the environment. High
grain prices lead farmers to crop land better left under the
cover of perennial forages.
All this turmoil comes because the livestock and crop sectors
of the farm economy live under an inevitable contradiction.
For one to prosper, it appears the other must suffer. High
crop prices pressure livestock producers. Low crop prices,
which usually accompany large, often low-quality crops, benefit
Shades of the Crow debate. The argument
for eliminating the Crow transportation subsidy was that it
would result in lower feed costs on the prairies and cause
an expansion of the livestock industry. This would happen
because the increase in freight costs would make it more profitable
to keep feed grains at home. The part a lot of people missed
was that the guy producing the feed grain would have less
money in his pocket.
Biofuels replacing straight subsidies?
The livestock industry did expand and briefly flourish. But
low grain prices drove tens of thousands of farmers off the
land and forced governments to step up subsidy payments. Eventually,
governments latched onto a brilliant way to get consumers
to subsidize farmers. Thus the biofuels industry was invented.
There is a lot of irony in all this. Higher crop prices will
result in increased production and increased exports. It will
also lead to the next round of hog barn bankruptcies and a
reduction in cattle numbers, unless governments step up aid
to these sectors substantially. Value-added processing will
take a hit as a result. We will be back where we were before
the Crow was eliminated.
Meanwhile, the railways, grain traders, oil giants, and seed,
chemical and fertilizer companies will be laughing all the
way to the bank.