Challenges from increased grain prices

At least two interesting challenges will occur at the local level. First, there is likely to be an impact on land prices. As grain prices rise, land prices and rental rates will be bid up. Grain prices, however, are not the sole determinant of farm profits. The cost of production is also increasing, which will push farm profits down. Farmers need to be mindful of what the net returns will be over the longer term and how much they can afford to bid for land. Second, the livestock and ethanol sectors are going to be adversely affected. Both hog and beef producers will see some very lean years. We expect these sectors to shrink in size as some producers go out of business, with few, if any, new entrants. The ethanol industry, which is just emerging with considerable encouragement from governments and industry leaders, will also be adversely affected. An interesting policy question is whether we should just let these industries take a financial hit after encouraging them so strongly? Should these sectors be provided with assistance today to ensure that they are still present when grain prices again fall?

At the national level the federal government will appreciate not having to contend with grain farmers asking for financial assistance. Farm income support programs will now be used to reduce the financial stress of livestock producers. Hopefully the provincial and federal support will be sufficient and quickly administered to help these producers. Crop insurance can be expected to be under significant pressure. With a doubling of crop prices, the liability of crop insurance will increase and this could place financial pressure on a province like Saskatchewan should we have a large number of claims due to drought or frost. Saskatchewan has a very large crop insurance program with a liability of approximately 2 billion dollars (all crops, forages, etc.) in 2007 that may rise to 3 billion dollars for the 2008 crop (depending on various factors such as farmer participation rates). An additional national issue is the price of food. The current high dollar has restrained the increase in food prices; however, governments will be watching food prices with interest. Expect to hear more about increases in food prices in the future.

At the international level the issue is what to do with the world trade talks. Most of the coupled subsidies in the United States and Europe will not be in effect under the current price scenario. Decoupled payments like the single payment scheme in Europe will continue to pay grain producers a per acreage payment. However, the question is how will governments view the high price of farm products and the resulting rise in food costs? Will they see this as an opportunity to dump a number of the farm protection policies, arguing they are no longer needed? Or will they see the high prices as a food security threat and argue to retain or even increase the support for agricultural production? Both arguments are currently in the media.

These are interesting times. Agriculture and food are sensitive issues for many countries, including Canada - that has not changed.

This blog entry was authored by Hartley Furtan, a professor in the Department of Bioresources Policy, Business and Economics at the U of S. To read additional Illative Blog entries or to leave comments on this entry, please visit www.illativeblog.ca. The Illative Blog is an initiative by the Knowledge Impact in Society (KIS) Project based out of the University of Saskatchewan. Email correspondence can be sent to kis.project@usask.ca