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
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
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.