Battles begin with treaties
When armies battle, bombs fall during the heat of battle. In a trade war, the explosions don't start until after the truce is signed.North America's grain and oilseed markets have been rocked by blast after blast since the inking of the Uruguay GATT accord in 1994. There have been nuclear eruptions, like corn's run up to $7 per bushel in 1995. But there have been meltdowns, too, and all along a staccato of grenade bursts has kept the market on edge, like early April's unexpected 20 cent drop in soybean prices.
Is volatility the price of peace? Or is it a kind of collateral damage that can be fixed during the World Trade Organization talks, scheduled to begin in Seattle this November?
Either way, the experts say, the best offence is a good defence - it's time to learn how to build a bomb shelter, using tools such as forward contracting and options.
"The market has been let loose," says Brian Doidge, economist at Ridgetown College. "The volatility we've seen over the last few years is a taste of what we have to expect for years to come."
As much as Canadians hated the U.S./European trade war of the late 1980s, it had this benefit: It kept prices stable. In large measure, that was due to internal U.S. policies such as paying set-aside grants to lure American farmers into idling part of their acreage, and the reserve system. Each year, the U.S. agricultur#e department announced support prices for major grains. If market prices dropped below this price, farmers could simply turn their crop over to the government, which locked the crops away until prices recovered. The message to the world's buyers was, if you let prices fall below the strike price, you aren't going to be able to buy any grain.
Now, Washington has essentially kept the support price for its farmers, but has stopped taking the grain off the market. Called the loan rate system##, it guarantees American farmers US$1.89 for their corn and $5.26 for their soybeans over the next three years.
If the market falls lower, growers need only drop in at their local government office to pick up a cheque to cover the difference. While there, they pick up other cheques, too. Last fall, helped with a pre-election US$6 billion boost in farm spending, the total was US$1.04 per bushel of corn.
Canadian farmers, meanwhile, can hope for roughly 25 cents a bushel from their market revenue (GRIP) program - and hope they've put enough into their NISA accounts to make a withdrawal worthwhile.
Amazingly, the subsidy spread appears to be completely legitimate under GATT. Figures that Canadian Federation of Agriculture president Bob Friesen presented to the House Standing Committee on Foreign Affairs show that U.S. farm spending is only 27 per cent of what's allowed. In Europe, it's 60 per cent. In Japan it's 70 per cent. In Canada, it's 15 per cent. "The federal government," Friesen said, "must provide Canadian farmers with the domestic support necessary to offset the effects of domestic support spending in other countries."
Optimistic forecasts say it will take a minimum three years to hammer out a new trade deal. The Uruguay round took seven. And even if the trade talks are successful, there's no way to predict what the world will look like when the peace finally arrives.
Will Canadian farmers be casualties? Growers should remember, Doidge says, that if volatility means prices can drop like a stone, they can also take off like a rocket. "Farm groups will try to save the safety net system, but on its own it won't be enough," he says. "The key is individual risk management, finding ways to ride out the lows so you can grab some of the highs." - Tom Button
© copyright 1999 Agricultural Publishing Company Limited.
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Pork producers eyeing packers
Ken Palen's pork packer war chest could make its first investment by this fall, and Gary Hartin couldn't be happier.Hartin, who runs Lime Lake Packers in Marlbank, north of Napanee, is one of seven small to medium-sized Ontario pork packers who have told Palen they want a piece of the new Independent Hog Producer Investment Corporation to expand their kills by 10,000 animals a week. The combined expansion would almost double the current weekly 12,000-head kill by Ontario's provincially inspected pork packers - good news for shackle-space starved Ontario pork producers.
The aim of the three-month-old corporation, which has already been pledged over $2 million in producer checkoffs, is to invest producer money to keep as many viable pork buyers in the province as possible. The 146 provincially-inspected pork packers face costly upgrades as the province moves away from a two-tier inspection system to national standards, and as large plants on both sides of the border pledge to have HACCP in place by January, 2000.
Lime Lake Packers, for instance, faces costs of $75,000 to $100,000 in upgrades to the 25-year-old plant to meet new national standards to be in place by April, 2001. Bullish on local markets in Kingston and Belleville, however, Hartin says he could expand his kill from 150 pigs a week to 1,000 and build a new plant.
With producer surveys still flowing in, Palen, who runs a premix company in Centralia, reports that 300 farms - representing 48,000 sows and 17,000 slaughter pigs a week - had committed to a voluntary checkoff of $2.74 a pig.
That would put the packer fund at over $2.3 million, but Palen cautioned 250 producers at the Independent Hog Producers of Ontario's second public meeting in Exeter late March that it couldn't be done on the cheap.
He cited figures from plant consultant Lyle Norrie indicating that a new plant would cost between $30 and $50 per slaughter pig. Depending on throughput, that would cost out to $1.5 million at 20 pigs per hour (600 per week) to $17 million at 220 per hour (6,600 per week).
Startup costs alone for forming the new corporation and doing proper due diligence will be $150,000, said consultant Bob Earley, formerly with Deloitte Touche. As well as the voluntary checkoff, producers will be asked to purchase an initial share for $450 in three $150 installments, plus a $50 annual membership in the Independent Hog Producers of Ontario, which will be the investment corporation's political arm.
"The biggest mistake we could make is not setting up a business startup plan that's properly financed," said Palen. The corporation's first investment will be under "intense scrutiny," he said. The group is targeting Sept. 1 for a startup date for the corporation, Earley said, but hopes to find a way of setting aside checkoff funds over the summer so projects can begin as soon as possible.
With a slight improvement in prices and spring planting looming, producers in Exeter appear to be sticking with the venture, but had some nuts and bolts questions. Many in the room were also members of the 3-P co-operative that plans to build a plant in London. Asked about duplicating 3-P's work, Palen reported on a favourable meeting with 3-P. The fund directors could decide to invest there, he said.
Palen said the venture has the support of the Ontario Federation of Agriculture, the Christian Farmers Federation of Ontario and the Ontario Independent Meat Packers Association. Ontario Pork helped mail out surveys and has agreed to administer a checkoff.
With a lawyer and two consultants, the venture is in the throes of drafting a structure, tackling the reams of paperwork, and meeting with government. While provincial Agriculture Minister Noble Villeneuve has said he won't fund "bricks and mortar," his staff has directed the group to the Rural Jobs Strategy and CanAdapt.
Palen has put out the call for a board of directors, and a raft of volunteers will solicit memberships and do informal market studies with meat buyers in their areas. Palen said the future for Ontario's independent producers lies in serving local markets. Detroit and New York state combined have the same population as Canada, he said. Companies marketing new niche products such as stir fry, pork bits and cabbage rolls "will need pork and will buy from independents due to fast service and freshness," he said. - John Muggeridge
© copyright 1999 Agricultural Publishing Company Limited.
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Details, details
Here's a preliminary sketch of how the Independent Hog Producer Investment Corporation would look:
- It will be structured as a corporation and limited partnership. The fund would lend money to packers as a secured debt, and the farmers' return would be in the form of interest paid on the loan, and any other terms to be negotiated, such as shares in the packer, to a maximum of 49 per cent. Directors would decide on investing any profits and investors would be paid dividends on their shares.- During negotiations, an investors' advisory council made up of experts would ensure due diligence and projects would be monitored closely.
- As shareholders, farmers wouldn't be liable for a packer failure.
- As the checkoff is voluntary, farmers could stop and start at will.
- Lump sum investments, from weaner producers who can't check off slaughter pigs for instance, would be permitted, but not as a means of gaining voting control.
- Producers could get their money out but the timing would have to be worked out to keep the fund viable.
- A portion of the investment could be RRSP-eligible to the maximum allowed $13,500. "Any and all favourable tax treatment" will be explored, said Earley.
© copyright 1999 Agricultural Publishing Company Limited.
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OATI funding squeezed
Federal spending cuts have forced the Ontario Agricultural Training Institute to look further afield for training course funding.In recent years, funding for OATI training courses that cover everything from commodity trading to farm accounting has come from the Farm Business Management Program (FBMP), which drew federal funding from the Canadian Adaptation and Rural Development Fund (CARD).
But changes to the CARD fund announced last month will eliminate support for training, says Margery Taylor, OATI's general manager. FBMP training support has fallen steadily over a three-year period from about $1 million to $175,000 in the current fiscal year.
Taylor says the loss of funding will make it difficult to maintain the infrastructure needed for OATI training delivery. OATI will get some money from the CARD program, but new money will have to be found to pay for local co-ordinators, facilitators and a communications network.
When OATI started training courses 10 years ago, they were quite inexpensive, says Taylor. But with funding cuts farmers now pay 70 per cent of the direct costs of training delivery. Courses now cost in excess of $60, depending on duration.
Full cost recovery is not a viable option because "of the nature of the marketplace," Taylor says. "You only have small numbers of people able to attend the courses locally" and charging the full cost of courses would make them too expensive for farmers, she says.
OATI has been partnering with commodity groups to deliver specific courses of interest to producers. The Ontario wheat board sponsors Making Money From Wheat, a commodity marketing course. Taylor expects similar arrangements to develop with other commodity boards.
Taylor also points to a new federal-provincial education and training agreement that will see training dollars flow through the provinces. Some of that money could end up in OATI coffers.
Taylor says the farm community needs to mount an aggressive campaign to ensure farmers get their fair share of funding.
"Education is a provincial jurisdiction, so it's very important that we lobby at the farm level to make sure agriculture isn't forgotten." - Bernard Tobin
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Disaster cheques signed
By the end of last month OMAFRA officials administering the provincial government's disaster relief program had written about 1,200 cheques totaling more than $11 million. The program began with $40 million in the kitty and has received a total of 2,200 applications to date."At income tax time we may get another flood of applications," predicts David Hope, OMAFRA's policy analysis branch director. He reasons some farmers may be trying to use one trip to the accountant for both disaster relief and income tax.
Like their counterparts in all provinces but Manitoba and Saskatchewan, Hope's branch will also administer the long-awaited federal disaster program once Ottawa and Queen's Park sign an agreement. It was originally scheduled to have been in place by the end of March.
The federal government will pay for 60 per cent of disaster relief, while the provinces are picking up the other 40 per cent. But Hope says farmers shouldn't expect to get 50 per cent more from the federal program.
Payouts will be reduced by Net Income Stabilization Account balances and unlike the provincial program, producers will have to show income tax information. - Robert Irwin
© copyright 1999 Agricultural Publishing Company Limited.
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Province kicks in ambulance money
The provincial government has agreed to help out cash-strapped municipal governments by picking up half the tab for ambulance and public health services.The province had planned to download the entire cost of the services, estimated at $600 million annually, but last month agreed to pay half the cost, leaving cities and towns with a $300 million bill.
Local governments inherited welfare, health and ambulance costs as part of the government's downloading program that would see the province pick up the cost of education. But cities and towns have argued they were getting the short end of the stick and would be forced to raise taxes or cut services to balance their books.
Claude Guillemette, chairman of the Rural Ontario Municipalities Association, says his organization has been lobbying for the province to take over the full cost of land ambulances, but "50 per cent is certainly going to help the rural municipalities."
The province has also agreed to delay the transfer of land ambulance responsibilities for one more year, to Jan. 1, 2001.
"The delay will give us more time to swallow the first pill - subsidized housing, welfare and all those costs," says Guillemette.
John Van Turnhout, chairman of the Ontario Federation of Agriculture's rural affairs committee, says provincial standards for ambulance service are a good thing because, "in rural Ontario if you have substandard ambulances you may not get to the hospital on time."
But the province had to realize that smaller rural municipalities with a limited tax base would have difficulty paying the bill, Van Turnhout says.
"If they did change it they must have seen that there was a real problem." The government "is finally recognizing that rural Ontario does have different needs than urban areas," Van Turnhout says. - Bernard Tobin
© copyright 1999 Agricultural Publishing Company Limited.
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Nap re-elected for second term
At their March 31 meeting Ontario Pork directors elected Will Nap, Simcoe county, to a second one-year term as chairman. Nap manages a 430 sow farrow-to-finish operation near Thornton, and holds an MSc from the University of Guelph.Clare Schlegel, Perth county, was re-elected to a second term as vice-chair. He owns four hog finishing barns that are part of a multi-site production loop.
New directors on the pork board, which represents the province's 5,500 pork producers, include Mary Ann Hendrikx, Middlesex; Dave Linton, Huron; and Larry Skinner, Perth county.
Back for another season on the executive are former chairman Carl Moore, Oxford; Andy Ernewein, Bruce; Dennis Zekveld, Victoria; and John Boer, Lambton.
Pork board chief executive officer Paul Knechtel is also an executive member.
© copyright 1999 Agricultural Publishing Company Limited.
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Profits all over the map
Most farms are making last minute planting decisions, carefully studying Chicago price moves and trying to guess whether the big money speculators will like corn more than soybeans or vice versa.Details of an intensive cost-of-production analysis from 60 working Ontario farms, however, suggests there may be as much or more to be gained by taking a harder look at inputs. The study, called Profit Tracker, is funded by federal dollars from CanAdapt and is co-ordinated through the Innovative Farmers Association of Ontario.
On the study farms, actual production cost for a bushel of corn ranged from $1.15 to as much as $2.88 in 1998, with an average of $2.08, points out IFAO fieldman Don Carruthers. Soybeans showed an even wider spread, ranging from a low of $1.75 per bushel to a high of $11.17, and an average $4.45.
Most important, corn returned an average $114.48 per acre to land and management; one farm lost $2.06 per acre, while the most profitable notched a return of $491.52.
Soybeans were more profitable than corn, with an average $196.23 returned to land and management. Soybeans also showed a wide variation, however, with one farm taking a $67.41 per acre loss on the year, while another earned $409.33.
Costs were calculated based on detailed farm records, with inputs priced according to suggested retail prices. Field operation costs were based on the provincial survey of custom rates. Crop prices were based on December board prices at Chatham.
Not surprisingly, yield is a key driver of profitability. The surprise with yield, however, is that it's a lot less dependent on location than most farmers might think (See Heat units.).
Also surprising is that a big crop isn't always an expensive crop. On average, the most profitable farms spent $9 an acre less to grow their corn, and $56 less to grow an acre of soybeans than the least profitable farms.
Rotations work, the Profit Tracker report confirms. The average yield for corn grown on corn was 138.2 bushels per acre; planted after soys, yield was 148.3 bushels. Rotations also worked for soybeans. Soys grown on soys yielded 40 bushels; after corn, yield was 45.8.
The Profit Tracker report is in its sixth year, and the IFAO is seeking more farmers to submit their records for 1999, Carruthers says.
"It's an eye-opening experience," he says. "This is one of the few ways to gauge your performance in terms of the big picture." - Tom Button
© copyright 1999 Agricultural Publishing Company Limited.
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Building tax break
Turning the sod on a new barn this year? Chances are you'll get a break on the eight-per-cent retail sales tax (RST).Ontario Agriculture Minister Noble Villeneuve announced late March that the government will introduce legislation to extend the three-year-old RST exemption on farm building materials to March 31, 2000. Farmers can submit for a rebate for any purchases of material for farm buildings made from April 1, 1999. If the legislation passes, the rebates will be processed.
Only commercial farmers may apply. The rebate applies to building materials such as wood, nails or paint used for building or modernizing a building or structure used for farm purposes only. Farmers have until Dec. 31, 2000 to submit applications.
Ontario Federation of Agriculture president Ed Segsworth applauds the move, but calls for a permanent program, with a more comprehensive list of RST-exempt items.
Forms are available at local OMAFRA and Ministry of Finance RST branches. 1-800-263-7965.
© copyright 1999 Agricultural Publishing Company Limited.
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Smiths Outstanding A sure sign spring's around the corner is the announcement of Ontario's Outstanding Young Farmer award. The 1999 presentation took place in Guelph March 27, and Mount Hope dairying couple Dale and Marie Smith were judged tops among six "very worthy" finalists, according to one of the three judges, Kerri-Sue Lang. Farm & Country - a provincial sponsor of the awards - will profile the Smith family's operation in an upcoming issue.
© copyright 1999 Agricultural Publishing Company Limited.
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