Beyond the oil patch, Canada’s West has China to thank for its economic prosperity. The Asian giant is gobbling up grains and oilseeds at an enormous pace, helping push prices sky high.
Hoping prices will remain strong, farmers are now aggressively planting the next crops to cash in on the surging demand.
But the planting frenzy has some agriculture experts worried. If the harvest proves bountiful, prices could be set for a big tumble.
In Canada, farmers are expected to plant a record canola crop, which would be the industry’s sixth consecutive record canola crop. This comes after the oilseed flirted with record prices a few weeks ago. Soybean acreage is forecast to set a new high, and Ontario farmers are on track to break their 1981 corn-for-grain record, according to Statistics Canada’s March farm survey.
The most telling statistic, however, is summerfallow and seeding intentions. Farmers in Canada plan to leave 3.97 million acres unseeded, a 68-per-cent drop from 2011.
Farmers in the United States are also expected to produce a record for feed grain, commodities like corn, sorghum, barley and oats, according to a United States Department of Agriculture report published Thursday.
“China came in like a person that has never eaten,” Chris Lehner, a commodity broker at Archer Financial Services in Kansas. “Every place that anybody across the Northern Hemisphere can plant a seed, it is going to be planted this year.”
China makes up 60 per cent of all international trade in oilseeds, said Don Brown, the acting director of economics at Alberta’s Department of Agriculture and Rural Development.
The high prices for commodities like soybeans, canola, and corn, prompted farmers to fill their fields with these seeds. But the race to capture high prices could backfire, said Mark Gold, the president of Top Third Ag Marketing in Chicago. Soybean prices recently neared an all-time high, and so-called old-crop corn rallied to its best price ever, he noted.
“People see these high prices and they want to plant every acre they can,” Mr. Gold said. “I believe we’re more than due for a correction in beans,” he said. His math also put corn in the oversupply column.
The “downside risk” for corn is about $2 (U.S.) per bushel, he said, while soybeans risk a drop of $4 to $5 per bushel. He is encouraging customers to buy put options to protect against the potential for falling prices. Mr. Gold pointed to 2008, when soybeans fell from $16 per bushel on July 3 to $8.25 per bushel by October 16.
Farmers are glad prices are high now, because growers are facing hot prices for so-called input costs, like seed, fertilizer, chemicals to ward off weeds, fuel and labour.
Farmers could be further hit by rising land costs. “It is going to be the most expensive corn that American farmers have ever planted,” Mr. Lehner from Archer Financial said. “It gets very tight for many of these guys.”
In Canada, the western provinces stand to gain the most from a big harvest should the weather – and markets – co-operate. But the domestic agriculture industry reaches well beyond the Prairie provinces. Canadian-grown canola, for example, contributes $15.4-billion to the economy each year, providing 228,000 jobs and tied to $8.2-billion in employee wages, according to the Canola Council of Canada.
Canola’s largest beneficiaries are Saskatchewan ($5.4-billion), Alberta ($5-billion), and Manitoba ($3.3-billion). However, Ontario rings in at $816-million, British Columbia at $550-million, and Quebec at $252-million. As emerging markets demand more livestock, grains, and oilseeds, agriculture will continue to have a prominent role in the economy.
David Rinneard, national manager for agriculture at Bank of Montreal, does not see a bubble. Demand for energy also helps strengthen demand for ag products as ethanol and other biofuels become more popular. Porter Airlines, for example, made Canada’s first commercial flight powered in part by biofuels in April.
“The energy aspect of this is not something that is going away in the near term,” Mr. Rinneard said.
But, in the end, it all comes back to China.
“[Emerging markets]are really good underpinnings as a foundation for prices to remain elevated,” Mr. Rinneard said. “As those economies expand … and as those people become more appreciative of broadened diets … they will continue to underpin the demand for ag-oriented products.”