The Canadian commodity and profit landscape.

Companies selling products to Canadian farmers face several challenges this year.

One is tight balance sheets in rural Canada. Simply put, most of the country's producers are not exactly flush with money. Crop prices are low; input costs high.

The good news is that a major recession in Canadian agriculture is probably bottoming out.

Canadian farmers' collective pocketbooks are certainly thinner than their friends in the U.S., at least if you believe the latest data from Statistics Canada and the United States Department of Agriculture (USDA).

According to data released in December 2004 and December 2005 Canadian net farm income was up from the depths of 2003 but still remains mired in a decade-long decline. The graph below compares Statistics Canada and USDA data to show that from 1995-2005, Canadian nominal net farm income declined by approximately 17 percent, while U.S. net farm income as reported by the USDA rose by about 60 percent.

The poorer performance in Canada in 2003 was due in part to a crashing cattle market caused by Canada's inability to export beef following the discovery of BSE.

In a more general sense, the relative decline in farm profits in Canada the past several years was due largely to smaller government payments for growers of crops in Canada than in the U.S.

A portion of blame for Canada's farm woes goes to a rising Canadian dollar. Since 2002, the Canadian dollar has risen from around 62 cents U.S. to the 85-cent zone. This has reduced the relative value of Canadian commodities expressed in U.S. dollars.

Let's look in more detail at the main commodity sectors of Canadian agriculture.

CROPS

Most crops exited 2005 in the bottom third of their 30-year trading ranges at the same time input costs were soaring to new highs.

The good news is, a lot of farmers are pleased about their 2005 yields. In fact, the cash-crop sector of Canada is enjoying a surging yield trend, with lots of new record highs set the past year. Most notably, canola and wheat yields shot to new highs in the West, while corn yields did the same in Ontario.

Other growers outside Canada's borders also accomplished exceptional yields, and the resulting large supplies pushed average prices lower.

For farmers, coping with the low prices is not easy. Fortunately, the marketplace has a way of curing low prices. Indeed, the adage that low prices will eventually cure low prices is as valid as ever. Given today's bargain-basement price tags, the global demand base for grains, oilseeds and special crops is expanding like never before.

FEEDGRAINS

The major feedgrains in Canada are barley, oats and feed wheat in the West and corn in the East. In January and February, farmers tend to look ahead, assessing new-crop contract prices for these crops. And if you were to ask most growers, they'd say most new-crop contract prices are far short of profitability. Here and there in Western Canada, the harvest-time bids for oats might show some profit, but other than that the pickings are slim.

That means farmers will be careful about what they plan to spend to plant their crops this spring.

Still, they will go ahead and plant these crops as they always have, it is a question of the acreage mix, and when they harvest them there's a good chance many will have higher prices. Supplies of these crops are not particularly burdensome. Global and domestic barley stocks are likely to be drawn down in 2006. A duty announced last month is likely to sharply reduce American corn imports. Canadian feed wheat supplies will also decline if the 2006 wheat crop is of normal or better-than-average quality.

So, although the coffee shops of the country are crammed with down-in-the-mouth farmers, some optimism could creep in later this year. Indeed, prices for feedgrains in the eastern side of the prairies and Ontario are already up from their harvest lows.

OILSEEDS

The main oilseed in Western Canada is canola. The canola market is overwhelmed with a record-large supply.

This market is the weakest of all the grains and oilseeds. Statistics Canada recently pegged 2005 production at 9.66 million tonnes--a record by far. So, while a record-high average yield might be considered a bright spot, the flip side is a glutted marketplace.

Prices for the main oilseed crop in Eastern Canada, soybeans, are doing marginally better. The U.S. market on which Canadian prices are based is up from the past fall, but appears vulnerable to pressure from a large South American crop and an expected jump in U.S. acreage.

Therefore, oilseeds could be under relatively more pressure than the feedgrain and wheat markets. Still, canola and soybeans are integral to Canadian cash-cropping and farmers will keep growing them, even in the face of low prices. Soybean areas could actually rise in 2006.

WHEAT

Wheat acreage in Western Canada has been in a downtrend since 1986 and returns lately haven't been stellar enough to prompt any big recovery in acres during 2006. For two years, overall quality has been below average, presenting an additional challenge.

The Canadian Wheat Board forecasts Canada's benchmark price for No. 1 Hard Red Spring wheat (13.5 percent protein) at C$204/tonne (Canadian) for 2005-06. That would be steady with 2004-05 but down from $210 in 2003-04 and $250 in 2002-03.

There is some potential for higher prices in the 2006-07 marketing year. World wheat stocks are low by historic standards, setting up the possibility of higher average prices during the 2006-07 marketing year. The number of days of excess supply is on the low side of a 30-year range. Weather conditions have been substandard in Russia and Ukraine. Wheat stocks in China are declining. No guarantees, but at least the upside potential is for prices and profits!

SPECIALTY CROPS

The heavyweight specialty crops in Western Canada are dry field peas and lentils. The past 10 years, producers have become better and better at growing these crops. And today, prices show it. Big crops have produced low prices.

Manitoba dry bean growers suffered through the second poor-yielding year in a row in 2005, while Ontario growers got generally good yields and record-high total production. Prices are down from a year ago due to big supplies Stateside.

Mustard and canary seed prices are at new lows for the decade, prompting any owners with staying power to lock the bin door and wait before selling for a couple of years if necessary. Sunflower prices aren't down quite as badly but are under some pressure caused by the past year's 88 percent jump in U.S. acreage.

Most years see a price spike somewhere in the specialty crop line-up. In 2004-05, big money came from flaxseed. In 2005-06 the star is the large caliber chickpea market. In 2006-07 a bull market will probably emerge somewhere, although at this early stage nobody can be sure when or where.

LIVESTOCK

The Beef Sector

Canada's beef business is still reeling from the impact of Bovine Spongi-form Encephalopathy (BSE), also known as Mad Cow Disease, but the worst is over.

Producers are pleased that cattle under 30 months of age can finally enter the U.S. and that other countries are opening their borders too, after a prolonged period of closed borders following the discovery of BSE in May 2003.

Older animals remain hemmed in, however, so cull cow supplies are heavy. And the hangover from the financial losses of the past two years won't be quickly cured. But, with Canadian cattle prices back on equal footing with U.S. prices, the worst of the crisis seems to be in the past.

In the U.S., the average fed steer price in 2005 was at a record high of about $87/cwt. (U.S.), and feeder cattle and calf prices were up in the stratosphere too. The graph below shows those strong U.S. fed cattle prices, along with Canadian prices (based on Ontario data), which are expressed in U.S. dollars for direct comparison. Notice that lately, Canadian prices have finally risen back to a normal pre-BSE relationship to U.S. prices--and that they're at the highest in several years.

Another positive note: While the gates to the U.S. were closed from May, 2003 to July, 2005 and cattle backed up in the country, Canadians adapted by building more processing plants. Therefore, in the future a greater percentage of Canada's cattle will be processed at home, lessening the country's reliance on live cattle exports.

HOGS

The Canadian pig business has seen reasonable profits the past two years, just as it has in the U.S.

The biggest input cost on most hog farms is feed. And feed has been cheap. Barley has been cheap in Western Canada, as has corn in Ontario and Quebec.

Meanwhile, hog prices have spent most of the past couple of years on the high side of a long-term trading range.

Feed cost won't stay down forever, partly because a duty against U.S. corn will slightly boost prices during much of 2006. And hog average prices could slip the coming year due in part to minor expansion of the breeding herd in the U.S. and Canada.

Still, this industry is in a healthy position to withstand some adversity. If need be, there's room for some belt tightening after the stretch of wide feeding margins.

SUPPLY MANAGEMENT

Canada's dairy and poultry producers are still receiving a steady income flow. In the U.S., imports are carefully controlled and production is limited by quotas. A strong foundation for profit.

There may be cracks in the mortar of Canada's supply management systems but their foundations are likely to stand firm for several years. Even pressure at World Trade Organization talks is unlikely to unravel this quota system soon. Any changes that are forced from new trade deals would take many years to have an impact.

As a result, companies marketing to Canada's supply management sectors will continue to see a stable client base.

IN SUMMARY

Canadian agriculture is dynamic; always evolving, diversified, unique. Its greatest resource is its people. Recent adversity is providing a fertile base for new growth. There are farmers out there still expanding, still moving forward, still optimistic, resilient and ready to meet the challenges of the times. One key goal for agri-marketers is to find them and work with them.

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DePutter Publishing Ltd. is a leading commodity market analysis firm based in London, Ontario, Canada and can be reached at 800/434-0834, or by e-mail: [e-mail]