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Canadian Market Report - April 24 2017

25 April 2017
Genesus - The first power in genetics

Although it may not sound as exotic as the Bar X Land & Cattle Company as I’ve commented before the Ontario Land & Hogs Company has proven once again to be a very sustainable model. I draw from two recent items in the news below.

From - CANADIAN BUSINESS

Growth slows for Canadian farmland value amid declining field-crop prices by Eric Atkins
The Globe and Mail | Last Updated: Monday, Apr. 10, 2017 

The surge in the value of agricultural real estate is cooling along with crop prices and farm revenues.

Average farmland values rose by 8 per cent in 2016, down from 10 per cent in 2015 and 14 per cent in 2014 according to Farm Credit Canada, the Crown corporation that is Canada’s biggest lender to farmers.

The biggest driver of the decline in growth is lower global prices for field crops, said J.P. Gervais, chief agricultural economist at FCC.

An acre on the average Canadian farm doubled in value between 2005 and 2015, to $2,700, including the buildings, according to Statistics Canada.
Ontario leads the list, at $10,000 an acre, followed by B.C. at $5,450 and Quebec at $5,100.

 

From - Kevin Grier Market Analysis and Consulting Inc. – Canadian Pork Market Review - Monday, Apr. 10, 2017 -

Ontario Expansion

As noted here previously, the Statistics Canada January 1, 2017 Hog Inventory report showed the Canadian sow inventory had increased by 1% compared to January 2016. That was an increase of about 14,500 sows for a total of 1.23 million sows in Canada. Both Manitoba and Saskatchewan saw very modest declines in the provincial sow herds while Alberta had a 1% increase. British Columbia’s already very small herd declined further by nearly 4%.

For its part, Quebec saw an above average growth of nearly 2% as of January 1 this year compared to January 1 2016. What was also very interesting about the report was that Ontario had the biggest increase of the provinces with a 3.3% growth rate in over the course of 2016. In fact of the 14,500 head net growth in Canada, 10,000 of that came from Ontario. What is even more interesting is that the 10,000 head rate of growth is likely to continue or to be exceeded in 2017.

So is there a correlation here? I’m certainly no statistician and have no scientific or survey data to support it but I would be inclined to say yes, and a very strong one at that. Although growth in Canada has been relatively moderate we have close to 70% of that growth coming from Ontario.

Why?

Well, although the last three years in hog business have been good with 2014 one for the record books it would be difficult to make a case for Ontario to have been in any better than any other region of Canada. In fact with closing of the Quality Meats packing plant and the perpetual shortage of shackles in Ontario you could make a case for it being worse. Certainly the available packers haven’t had to chase hogs and the question of “where are you going to get your hogs slaughtered” is a virtual constant concern.

However we then turn to the first article on land prices. We see Ontario prices approximately four times the national average and approximately twice the next nearest province. Further the $10,000 per acre is the Ontario average. Most observers I believe would suggest that the seven counties in South western Ontario that would comprise 85% plus of the hog raising area the average land price would be closer to $20,000 per acre. This gives you considerable ballast for challenging times.

Appreciate you can’t eat equity and ultimately cash flow is king. But the backstop of a hard asset (that at least for now is appreciating) is a great comfort to the bank. Many an Ontario long term (25+ years) producer have spoken to point out that although dirt farming perhaps looks easier and more appealing (certainly over the last number of years) it just makes you a living. It doesn’t buy much of anything. It is the hogs that bought the next farm, the equipment, the barns…

As to what drives this tremendous price in Ontario a lot of factors. There is a lot of quota (supply managed dairy & feathers) in Ontario with equity and cash flow. This with low interest rates has them chasing land. The cash crop farmers until lately have had a good run so they’re in the hunt. As pointed out the hog farmer has come to see this as a very sustainable ingredient to there model.This coupled with urban pressure (South western Ontario is the most populous region in Canada) makes for a heady mix on a commodity as they say “they’re not making any more of”.

As to any storm clouds on this horizon the press is full of dire warnings on ever accelerating house prices in the GTA (Greater Toronto Area) and rippling out into all of South western Ontario. Is it a bubble and does it extend to farmland prices? Who knows but I’ve come to believe when you get to thinking anything can only go one way be it up or down you will most likely end up disappointed.

Hog producers are probably uniquely inoculated against such a belief, as they’re certainly in a business not for the faint of heart with a cycle that can make a rollercoaster ride look like a Sunday drive. Certainly rising interest rates will change the math but for the long game the original integrators of land to corn to hogs to manure and back around looks like a very winning, sustainable model.


To find out more about Genesus Genetics, please take the time to visit their website at www.genesus.com .



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