People Still Need To Eat

Don’t worry too much. Monitor changes and stay on top of your costs and you’ll be well positioned to take advantage of

the opportunities in agriculture.

Last winter as financial markets crashed and the number of jobless in Canada hit eight per cent, agriculture held its own. Agriculture, it turns out, is more recession-proof than other industries because, plainly put, people need to eat.

“In a recession the demand for food commodities may fluctuate but it’s steady,” says Roy Erickson, PMG AgCoach. “Where there’s demand, there’s opportunity for farmers.”

We’re seeing signs that the economy is starting to turn around. The Baltic Index on freight is picking up slightly, and ocean freight rates are also starting to recover. Canola, lentils and other crops are making farmers money, so I think agriculture is well positioned to open up opportunities that will lead us out of the recession.

“Farmers may not have the optimism they had a year ago, but basically we’re in good shape,” says Erickson. “Some of them feel they missed out on big marketing opportunities last season and they did. That happens. But there are plenty of good opportunities on the horizon in ’09.”

We say to producers: You have to get over missed opportunities. Figure out how to get a return on your cash and get your marketing done for ’09. Don’t wait for markets to tip over and go down again before you sell. That’s not going to work.

I think with credit a little tighter, farmers know they can’t just extend their operating capital and sit on it for an indefinite period of time. A bin full of grain isn’t necessarily a very good bank account.

Tune in the big picture on commodity prices, advises Erickson. “In ’08, commodity prices spiked and then fell back, but we didn’t fall all the way back to 2006. We’re still on the new price plateau.”

The recession has definitely given us cheaper capital. It’s more difficult to get and you may have to work harder for it, but it’s a boon for asset-based expenditures such as buildings. Mortgage lending is as cheap as we’ve ever seen it, so as the economy starts to turn around, the question becomes: When should I lock up floating rates?

In the past few months, global governments have blasted world economies with trillions of dollars that are starting to stimulate activity. I have concerns that we may be overdosing the economies. This could end up a debt-fuelled consumption binge that could trigger mass inflation. But I like to think we’re a little smarter now and won’t walk straight into it.

Food inflation is also making headlines. According to the April 17, 2009 Consumer Price Index, in the 12-month period leading up to March, bakery and other cereal products rose 8.4 per cent. Times appear to be ripe for farmers to reap more of the consumer’s food dollar.

“In the grain farming business we see very little return as the price of a box of cereal rises,” Erickson points out. “More return usually gets eaten up by transportation costs, but transportation is freed up and that may be one of the benefits of the recession.”

The cost of getting farm products to both domestic and foreign markets is lower as a result of lower fuel prices and lower demand. “Train loads of containers are going back to the West Coast empty so China can fill them up and keep the Wal-Marts running,” says Erickson. “This is working in the farmer’s favour. The large ’08 canola crop that was almost regarded as burdensome continues to move smoothly through the system.”

The recession is still hampering growth, but prospects for agriculture look brighter than for most other industries. We’re coming off a year of record-high lentil prices. Canola hitting $10 off the combine is very profitable. And let’s not forget that we’ve seen fertilizer prices drop by 70 per cent since last summer. Chemical is the wild card. We never really know where chemical prices are going to end up until the season is about over.

By and large, well-run farms are heading into a strong 2009 — stronger even than 2008. North America has experienced some late seeding, which tends to reduce yield and increase demand. If the 2009 crop is trimmed back, we’re looking at much stronger prices yet again.

All of a sudden farming is in the spotlight because it looks good in comparison to other industries. The importance of it has been raised to new heights. In the Middle East, Saudi Arabia and other oil-rich nations are now buying farmland all over the world.

We appear to be inching out of the recession, but will the early bubble of optimism burst? Some say we won’t see true recovery until 2010. My advice: Don’t worry too much. Monitor changes and stay on top of your costs and you’ll be well positioned to take advantage of the opportunities in agriculture.

“Agriculture is recession-proof because the simple fact is everybody needs calories to survive,” says Erickson. “Farmers are always the last to get laid off.”

Gary Pike is president of PMG. PMG provides management, marketing, business-planning advice and coaching to members who represent 2.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call toll free 1-877-410-7595.

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