Ag boom has risks
Agriculture is producing spectacular wealth for the grain industry, provoking a surge of investment by all parts of the industry, including farmers.
But amidst all the excitement and confidence, some at the recent Canada Grains Council annual meeting advised farmers to be cautious before leaping further into debt to exploit the present boom.
“My observation is what goes up, comes down,” said Kevin Hursh, an agricultural commentator and manager of a number of industry organizations.
“My message is: we all better be cautious.… You can still get yourself in trouble.”
The meeting heard about new investments in railways, prairie elevator grain storage and the port of Vancouver, and booming farmland sales between farmers.
“These are the most exciting times in decades to be in this industry and I think the vast majority of you likely share that view that we’re very lucky to be in this industry at this point in time,” said council chair Jean-Marc Ruest, a Richardson International vice-president.
The good times are built mostly on a foundation of high crop prices and high demand, which has prevailed since 2007. The surge of demand has given the grain industry a booming business in collecting crops on the Prairies and shipping them to port.
The surge in prices has given farmers profitability that they can use to improve their situations and expand operations.
Many analysts are bullish about the long-term prospects for farming and agriculture, citing the expanding and wealthier world population and the demand of the energy industry for biofuel.
Farm Credit Canada economist Jean-Phillippe Gervais said farmers’ debts compared to their equity has been steadily shrinking, a product of both high crop prices and rising land values. This is occurring even while most Canadians’ debt loads have been steadily climbing, he added.
However, analyst Chuck Penner warned that high crop and asset prices can’t be assumed to have be-come permanent.
He said he didn’t believe that the massive consumption of U.S. corn for ethanol production would necessarily stop prices slumping because the demand is levelling off and production remains strong. This is particularly a concern if U.S. production recovers from last year’s drought.
“The market has already adapted to using the five billion bushels of corn for ethanol. They don’t need any more,” said Penner.
“There is a floor. We’re not going to have $2 corn anymore, but where is that floor going to be? We’ve seen so much fluctuation and volatility. In the end it’s going to be hard to peg that but certainly it’s not where it is now.”
Hursh said many farmers are making higher profits but still earn most of their family income from off-farm. A gross revenue of $250,000 on a grain farm does not produce more than a reasonable income.
However, a farmer could get in trouble in a future price slump or extended period of low prices if the present profitability is used to justify major machinery or land purchases based on debt.
“Overall, we’re not that highly leveraged, but there are certain individuals, that if the market pulls back, they’re going to get their toenails clipped,” said Hursh.
“I’m still optimistic in the long term in agriculture, but I don’t believe it’s going to be quite the easy ride it’s been for the last few years.”
via The Western Producer http://www.producer.com/2013/04/ag-boom-has-risks/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+westernproducer+%28The+Western+Producer%29