Higher Canadian Grain Prices Cause for Concern

CANADA - Buyers of Canadian grains, both international and domestic, have started voicing their concern over the rising cost of products as a result of expanding North American ethanol production.
calendar icon 19 May 2007
clock icon 7 minute read

Increasing Demand for Ethanol Production Pushes Up Grain Prices

“With the ethanol industry growing so very rapidly the grains industry really hasn’t had a chance to catch up and provide enough volume for those industries [ethanol and livestock] and that’s had a positive impact on prices,” observes Canadian International Grains Institute director of feed Dr. Rex Newkirk.

“Corn prices have driven up quite dramatically and so there’s a carry on effect. Where the livestock industry was using corn, now they’re moving into other ingredients – into byproducts and into other grains such as barley and that has driven up the price of barley.”

Higher U.S. Corn Dives Up Canadian Barley and Wheat

Saskatchewan Pork Development Board policy analyst Mark Ferguson explains, “Feed wheat and feed barley have very strong linkage with corn prices due to the substitutability of these commodities and therefore, when you see a large increase in the corn price in the U.S., you see an accompanying increase in barley and to a lesser extent feed wheat.”

Ferguson estimates that over the last twelve months prices have nearly doubled putting a big squeeze on hog producer margins. He does note that prices have leveled out over the past couple of months.

“Obviously when your major ingredients, which are your cereal grains, the ones that provide energy in the diet, when they increase dramatically it’s very difficult for a hog producer to keep the ration cost the same.”

Increasing Costs Create Concern Among Buyers

Dr. Newkirk agrees that while the higher prices are good for grain producers, for buyers it creates some concern.

“They now see the cost of their material going up and that means their input costs are going up. It makes them worried that there could be further increases in the future and should they be looking for other types of grains?”

He concedes, “There’s always winners and losers in everything that happens and right now we’re in a fortunate position where farmers are gaining value out of the grains because of the ethanol industry. The challenge is that it’s happened so quickly that people are concerned about what will happen in the future and will we produce enough in the future for both industries and, if not, how will that settle out as far as competition between them?”

New Crop Production Expected to Influence Price Direction

Ferguson is convinced that it will be new crop that determines where prices are headed for the coming year.

He notes, “Ethanol demand is forecast to increase again next year and for the foreseeable future. So that’s just a fact. However, in response to the high prices of corn and wheat and barley this past year, planting intentions across the board are increasing.”

“When you have commodities like corn and wheat and barley, whenever the price increases people are going to respond and produce more.”

“According to Ag Canada the barley production is forecast to increase by 20 percent due to higher seeded area and yields. And corn production in Canada is forecast to increase by 24 percent this year for the same reasons. Producers of these commodities are increasing their production in response to price and the same thing's happening in the U.S.”

U.S. Corn Acreage and Output Expected to be a Factor

Perry Mohr, the CEO of the Manitoba Pork Marketing Coop points out, “Producers in the United States have adjusted and are looking at seeding more corn in recognition of the opportunity to capitalize on that market and the fact that it's fairly lucrative.”

“Hopefully we can have good growing conditions and a good crop which will alleviate some of the pressure,” he says. “Certainly we’ve got enough challenges in the hog industry, in particular, with all of the pressure of the Canadian dollar rising that we don't need to see high input prices as well."

With the number of ethanol plants projected to be built in the U.S., Mohr expects demand to be a factor on a go forward basis.

He notes the price of oil will also have a bearing on whether or not these ethanol plants are profitable. “Anything over $50 a barrel, ethanol plants are profitable and anything under that, it's negligible or there is no profits in the ethanol plants so obviously $65 a barrel oil will have an impact on the ethanol craze.”

He believes, from a grower's standpoint, the weather will play a role. “Obviously the impacts it will have on yields and the amount of acres that actually get planted to corn and any export sales the U.S. may be inclined to make over the next period of time will also have an impact on supply.”

Both Domestic and International Markets Impacted

Dr. Newkirk observes, “Most of the concern is around the livestock industry, particularly in Canada where we’ve relied very heavily on barley. Some people are seeing these increased prices and they’re not sure how long that'll last and they may go up some more in the future.”

“We also see it internationally. I spoke with a fellow recently from Japan who buys food barley. He was certainly expressing concerns about the fact that now they’re competing with the ethanol industry indirectly and that their barley prices have gone up. They’re worried that this may continue in the future and that could make it more difficult for them to use our grain.”

U.S. Feed Costs Impacted More Significantly than Canadian

One bright spot for Canadian hog producers is the fact that demand for feedgrains from ethanol has been much higher in the United States.

Ferguson explains, “Certainly there’s a lot more ethanol being produced in the U.S. and the expectation for expansion of that industry is a lot higher in the U.S. Their industry is expanding at a much higher rate than ours. The higher corn price right now relative to some of the western feed grains could shift the competitive advantage towards western Canada.”

Higher Corn Prices Erase U.S. Feeding Advantage

Mohr agrees that is the one positive to come out of the whole situation. “Certainly over the last ten years we’ve seen the pendulum shift where the Americans, due to the subsidies that they’ve had for the corn growers, you’ve seen the so called feed advantage shift to the U.S. Producers that I’ve spoken to have said there was probably between a five and ten dollar a hog advantage from a feed grains perspective to finish a hog in the U.S. versus here in Canada.”

However he suggests that currently if there is any feed advantage at all it is minimal. And maintains that the pendulum has swung closer to the middle and maybe even in the western Canadian farmer’s favor over the last little while saying, “With the increase in corn prices certainly that feed advantage has disappeared.”

Little Changes Expected Short Term-Long Term Trends Still Unclear

Ferguson doesn’t expect much change in feedgrain prices over the next few months and he is reluctant to make any predictions further out.

“We know that there’s going to be increased demand for ethanol. And we know there’s going to be more products available to produce ethanol from. So whether that is going to yield an increase or a decrease in the prices of feedgrains in the future is difficult to say.”

However, he suspects, “Once September rolls around we’ll know how accurate the predictions on carry out estimates are and we will see where prices are going to go for the coming year.”

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