Letter from Saskatchewan
It’s official: ag income in most provinces will decrease in 2007, with Saskatchewan bucking the trend

Higher grain prices will buoy one province, but hurt returns on hog farms all the way to the Atlantic Coast.

By Paul Beingessner

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Saskatchewan farmer Paul Beingessner covers Canadian agriculture from a High Plains perspective. His straight-talk style informs readers about corporate influence in national and international agriculture, national ag politics on both sides of the border, and why some farmers do the things they do. Click here for more information about Paul.

TRUAX, 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 expensive alternative.

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 them.

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.