The state of pulse processing on the Prairies

The condition of the industry in the past and the possibilities for the future

“I Just Dropped In To See What Condition My Condition Was In,” was a Mike Newbury song from 1968, a great song that captured the psychedelic era of the late 60s. The song refers to the LSD drug experience of that era, and while the comparison to drugs doesn’t fit, there is a parallel to an addictive industry called special crops.

Pulses have been the crop of choice for producers since about the time the song was written. Replacing summerfallow, enabling an expanded crop rotation, a cash crop that uses less water and adds nitrogen — pulse crops had side effects and challenges, but were purely addictive. As producers latched on to pulse crops, production grew from 87,750 metric tonnes in 1969 to almost 8 million metric tonnes in 2019, while the processing and exporting industry grew along with production.

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Initially, prairie special crop processors were seed growers, as they already had cleaning equipment on their farms. These seed growers cleaned the seed for the farmers, then served the new buyers, morphing from ma and pa processors to exporters. As the first generation of Canadian pulse exporters, they travelled the world selling pulses and helping to grow the industry. As volumes grew mainline elevators climbed on the pulse export bandwagon, but generally through shipping, rather than investing specific capital in pulse crop handling facilities. They affected the margins but not the overall direct capacity for handling the crops.

Today, many of this first generation of prairie-grown special crop exporters who started in the late 70s and early 80s, have been bought out: Parkland Pulse became ILTA; Walker seeds became Scoular; Western Grain became ADM. An exception is Simpson Seeds, which remains a family-run operation.

The industry’s next stages attracted importers from all over the world, as they invested in assets on the prairies from 2010 on. New entrants bought out existing business and invested in new mega-plants with high volume capacity built to handle pulses. Multinational companies like Agrocorp and ETG invested millions to buy and build a new platform of pulse volume shipping. Investments gushed in from around the world.

For farmers, high prices had made these crops some of the most profitable on the farm, so pulse production continued to rise, and processing capacity was following.

Then: a bad trip

While farmers were making record profits and high-volume plants were being built, the world’s largest pulse importer, India, was implementing its long-stated goal of food self-sufficiency, driven by record-high costs of its people’s staple food: pulses. India adjusted its minimum support premium, and with the blessing of good weather, the country’s special crop production increased. Using import tariffs and bans to decrease foreign supply and increase India’s domestic price, imports plunged. With the implementation of the ban, special crop exports from Canada were caught en route. Adding to an already tenuous situation, the cost of repositioning these exports had to be absorbed by Canadian exporters. Meanwhile, China was increasing its pea imports, but there were few alternative markets to replace any volume of demand for lentils.

The timing could not have been worse. Huge special crop production and export capacity suddenly encountered low demand. It was bad timing, like a bad trip. Plants that were committed to volume dropped their margins to stay busy. Margins were lower than when the industry began in the 70s. These low margins could not support the plants’ operational costs much less the return on investment expected by investors. To add to the mix, increased production from the FSU (Former Soviet Union) was making the global market much more competitive and price sensitive. Volumes decreased. Prices Decreased. Margins decreased. Repeat.

Perhaps like the addiction to LSD created psychedelic visions, investors’ high expectations drove an overdose of capital to take a trip to Western Canada.

The changes continue

All of this is right in the textbooks. Ag economics 101 defines agriculture as a high-risk, high-investment, low-return business. It has been ever so. The graph of the industry is like a classic wave, from startup through increase to the high of the wave to overbuilt.

ILTA is the classic boom and bust story. The self-proclaimed biggest special crop shipper ended up on the chopping block. Assets once expected to handle over 50 per cent of special crop production were listed for sale as an investors’ dream turned out to be a bad trip for investors, banks and especially farmers, who are still waiting to find out what percentage of the crops they delivered to ILTA they’ll be paid for after the dust settles on delivery insurance.

But this is a very diverse industry. Among the processors who have chosen the route of whole processing, we see the entrepreneurs — often family businesses — finding a niche in pet food, packaging, flours and other food product. For example, Prairie Fava, just won an “Outstanding Start-up of the Year” award in Manitoba. A new business with new food ideas, built on the expanding acreage of fava beans in Western Canada.

Murad Al-Katib of AGT Foods is synonymous with the wave of global outreach, a local & a globally familiar face of Saskatchewan pulses and investors. Beginning with whole processing, then splitting his enterprise and now stretches into an international company producing ingredients for human, pet and retail products This company started private, went public and is now private again, as its stock value also rode the wave of the industry up then down.

Investment interest came to the pulse industry not only through processing plants but also in producing plant protein for food. This trend toward value adding and diversification of the special crop sector is supported by growing interest in plant-based food.

What’s ahead?

In 40 years (give or take a few) a global industry emerged from ma and pa shops. Crops that were once called special have gone mainstream. Cash crops that defined rotations, research, plant genetics, innovation and equipment on the farms leveraged investment and brought forward a sector of processors. The pulse industry is no longer just a western Canadian success story, as the industry has increasing global competition to contend with. A new paradigm has emerged.

Another saga of investment realignment is told: ILTA assets have been sold; Viterra, a long-time exporter of pulses officially owns a dedicated special crop handling facility; ETG expands to multiple locations; and a new player enters, DG Global.

All players — large and small new and old — must find profitability, as handling overcapacity remains the largest factor in the potential profitability. Expect to see many special crop handlers moving into mainstream crops like canola wheat and barley — territory of the terminal handlers — creating a whole new group of players for those crops. Expect this move to drive diversity into global markets, redefining niche markets for traditional crops Expect some companies to diversify into food, feed, nutraceuticals and biodiverse products.

For decades the special crop industry has been defined by innovation, research and growth. It’s probably safe to say the highs are over, and there could be a few more bad trips to hit the analogues of history. The only constant: the condition is always changing.

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