|
 Agriculture
and Agri-Food Canada
Bi-weekly Bulletin
February 6, 2004 Volume 17 Number 3
INTRODUCTION
Expected net returns, derived from
projected prices, yields, and variable costs of production,
exert a major influence on seeding decisions. Current prices, soil moisture
conditions during seeding time, expected delivery opportunities,
cash flow and crop rotation requirements, potential disease and
pest problems, and on-farm stocks are also very important
factors which will affect seeding decisions. In 2004-2005, prices for almost
all crops are expected to decline from the previous year due to
the appreciation of the Canadian dollar, and an expected return
to near normal growing conditions and yields in Canada and the
major global exporting nations. In western Canada, areas seeded to
durum, canola and flaxseed are expected to increase while the
areas for spring wheat, barley, oats, most pulse and special
crops and summerfallow should decrease. In eastern Canada, higher area
seeded to corn and soybeans is expected to be partly offset by
lower area seeded to winter wheat. This issue of the Bi-weekly
Bulletin examines the net returns and area seeded for grains,
oilseeds, pulse and special crops in
Canada.
BACKGROUND
Expected returns are an important factor affecting cropping
decisions. Returns, net of variable or operating costs, affect
short-term cropping decisions, while returns, net of total costs
(fixed and variable), influence long-term decisions, such as
rotation patterns and entry into, or exit from the industry.
Variable costs change with the type of crop grown, while fixed
costs vary little with the type of crop. Fixed costs such as
land rental, property taxes, hired labour and machinery
depreciation, as well as the value of a farmer's own labour, are
not included in this analysis.
The costs and revenue forecasts in this bulletin are intended to
illustrate how expected net returns can be used to decide which
crops may be the most profitable. Producers must consider their
own costs, yields and expected commodity prices, as large
variations do exist between producers and throughout the growing
season.
As each province's agriculture department uses a different
methodology, the crop budgets are not comparable across
provinces. Saskatchewan Agriculture, Food and Rural
Revitalization provides crop budgets for crops seeded to fallow
and stubble land in the brown, dark brown and black soil zones.
Alberta Agriculture, Food and Rural Development (AAFRD) provide
budgets for crops seeded to fallow and stubble in the brown, and
dark brown soil zones. For the black and grey soil zones, AAFRD
provides budgets for only the crops seeded to stubble. Manitoba
Agriculture provides average crop budgets which do not
differentiate between fallow and stubble as most Manitoba crops
are grown on stubble.
The Ontario Ministry of Agriculture and Food provides average
crop budgets on various tillage systems.
Productivity in western Canada is related to soil type. For
example, the brown soil in the semi-arid region of the Prairies
is subject to wide variations in crop yields and is more subject
to drought than the dark brown soil zone. The black soil zone is
located in a higher moisture region and has better moisture
retention characteristics than the brown soil zone, resulting in
higher average yields. This zone is rarely subject to drought.
The grey soil zone, extending into the northern regions of the
Prairies, is characterized by higher moisture levels, cooler
temperatures, and a shorter growing season. Climatic conditions
also influence the susceptibility of crops to disease and pest
infestations, requiring different combinations and levels of
herbicides and pesticides.
PRICE FORECASTS
Price forecasts can vary considerably as a result of
unpredictable weather in Canada or major importing or exporting
countries and other changes in market factors.
YIELD FORECASTS
Average provincial yields have been forecast by AAFC, using
trend analysis. Adjustments for soil zone are based on
historical data from Statistics Canada. Adjustments to a
'stubble' basis were based on provincial data. Actual yields can
vary greatly due to factors such as weather, disease, pests or
input use.
For 2004-2005, AAFC average expected yields are assumed to be
slightly below trend for all wheat, coarse grains and oilseeds
and mostly below trend for pulse and special crops. Despite the
current below average precipitation levels that exist in about
65% of western Canada's area, normal precipitation levels are
assumed during the 2004 growing season.
Again during the 2004 growing season, yields will be dependant
upon timely rains as sub-soil conditions in areas currently in
drought remain well below normal levels. Drought areas and their
severity have significantly increased compared to a year ago in
Saskatchewan and Alberta. Precipitation levels in 2003 were not
sufficient to have supported a full drought recovery, and as a
result livestock feed, and dugout water supply problems could
likely be experienced again in 2004 if conditions are very hot
and dry. Grasshopper infestation during the summer of 2003 was
considered severe, causing considerable crop losses for farmers
and increased costs for pesticides. Areas with the highest
levels of infestation were east-central and south eastern
Alberta, south west Saskatchewan and south west Manitoba. The
extent and timing of dry weather during the last four years has
provided ideal breeding conditions for grasshoppers. As a result
of the warm sunny conditions during the late 2003 summer,
grasshopper infestations could again become an increasingly
significant pest particularly if dry conditions are
experienced during the June hatch. Environment Canada's spring
forecast calls for below normal precipitation in Alberta, normal
precipitation in Saskatchewan and above normal in Manitoba. For
the growing season, north-western Alberta and northern Manitoba
are expected to receive below normal precipitation with southern
Alberta, most of Saskatchewan and southern Manitoba experiencing
normal precipitation.
In Ontario and Quebec good precipitation levels during the fall
of 2003 has returned soil moisture conditions to above average
levels and has eliminated any dryness concerns that were
experienced during the growing season. Environment Canada's June
- August forecast is predicting above normal precipitation for
these provinces.
EXPENSES
Fertilizer Costs
Fertilizer costs are a significant factor in seeding decisions.
Natural gas is the primary raw material required for the
production of ammonia, which is the foundation for virtually all
forms of nitrogen fertilizer. The average North American ammonia
factory requires about 33.5 million British thermal units (MBtu)
to produce 1 tonne of ammonia. Natural gas costs are currently
about US$5.80/MBtu compared with about US$7.00/MBtu in 2003 and
about US$3.30/MBtu in 2002. With natural gas priced at about
US$5.80/MBtu, 1 tonne of nitrogen fertilizer will cost about
US$220 to produce {33.5 MBtu x $5.80 + $25 (fixed cost)}
compared to about US$260 in 2003 and US$136 in 2002.
Lower natural gas prices compared to last year will ensure that
fertilizer supplies will be sufficient because lower natural gas
prices relative to last year have returned some fertilizer
plants back to profitability but others remain closed. Offshore
nitrogen imports through the US Gulf ports are expected to
remain at high levels. Tight
North American supplies are expected to keep natural gas prices
relatively high especially if a cold winter occurs. Because of
lower natural gas supplies and expected higher seeded and
harvest areas, most analysts expect nitrogen fertilizer prices
to remain at current levels in the short-term. Higher fertilizer
prices have been offset by a higher Canadian dollar.
Farm Fuel
Strong global demand, uncertainty surrounding Iraq's ability to
produce sufficient oil in the short-term and smaller US
reserves, compounded by the Organization of the Petroleum
Exporting Countries' success in
controlling supply, have driven oil prices to near US$34/barrel.
Farm fuel prices are expected to be near 2003 levels, however,
continued strong global demand with an expected recovery in the
US economy may drive oil prices higher. As a result, farm fuel
prices may be higher in 2004 compared to 2003.
Herbicides and Pesticides Herbicide use in 2004 will vary
greatly depending on the crop seeded and by the growing
conditions. For the majority of crops, use is expected to rise
modestly over 2003 due to a larger harvested area and
anticipated pest problems. As a result, prices are expected to
be slightly higher than last year.
In central areas of western Canada, pesticide use is likely to
be higher than normal to combat the probability of higher levels
of grasshoppers in Alberta and Manitoba, especially if
conditions remain dry. Expected increases in grasshopper
populations will increase the economic thresholds at which it is
financially beneficial to spray crops. While economic thresholds
vary from crop to crop and with various crop stages, for cereal
crops it will generally be financially beneficial to spray when
eight or more grasshoppers per square metre (/m2) are present.
For crops such as lentils, as few as 2/m2 during emergence or
the critical pudding stage is enough to require control.
Seed
The cost of seed is expected to increase marginally in 2004 for
almost all crops. However seed costs when compared to 2003 are
expected to vary considerably. This variability is expected to
be higher for crops such as canola seed, to lower for crops such
as wheat and oats.
Crop Insurance
Crop insurance costs in 2004 are expected to be the same as in
2003, due to a significant reduction in crop claims. However,
rates will vary depending on the province and crop seeded.
CROP BUDGETS: PRAIRIE PROVINCES
There are significant differences in the variable costs between
provinces and soil zones. Variations in costs for seed
(including treatment), fertilizer and pesticides can account for
60% and more of the variation in total cost.
Comparing budgets across the provinces, custom work costs for
western Canada have been included in the chemical costs, while
for Ontario, custom work costs have been added to chemical and
fertilizer costs. The 'other' cost category is used to assign a
value to overhead expenses such as utilities. In Ontario, other
costs include marketing fees and drying. The cost of management
and/or owner/operator labour has not been included in the
budgets.
In Manitoba, the highest projected net returns are for
confectionary sunflower seed, canola, flaxseed, oats, and dry
peas. Net returns are forecast to be the lowest for Canada
Western Red Spring (CWRS) wheat and feed barley due to higher
costs and lower expected prices in 2004-2005.
In the Saskatchewan brown soil zone, the highest net returns are
for large green lentils, CWRS wheat, desi chick peas, and durum.
Yellow mustard seed, large kabuli chick peas, and feed barley
are expected to provide the lowest net return per hectare. In
the black soil zone, malting barley (Special Select 2 Row -
SS2R) is expected to provide the highest potential net return,
followed by canola, flaxseed, oats, dry peas, CWRS wheat and
feed barley.
In the Alberta brown soil zone, the potential net returns for
large kabuli chick peas, canola and large green lentils are the
highest. The lowest prospects for net returns are durum, feed
barley and CWRS wheat. In the black soil zone, Argentine canola,
Canada Prairie Spring (CPS) wheat, dry peas and CWRS wheat will
provide the highest net returns. Feed barley and oats are
expected to have more modest net returns.
In Ontario, soybeans are expected to have the highest net return
due to strong prices. Net returns from white pea beans, grain
corn, Soft White Winter (SWW) wheat, and Hard Red Winter (HRW)
wheat are also expected to be high. Returns for feed barley are
expected to be very low; however most of this crop is used on
farm for feeding so that market price is less of a factor in
planting decisions.
AREA SHIFTS
In western Canada, area seeded to winter wheat, durum, corn,
lentils and oilseeds is expected to increase. The area seeded to
spring wheat, oats, barley and most pulse and special crops is
expected to decline. In eastern Canada, the significant increase
in area seeded to corn and soybeans is mostly offset by lower
area seeded to winter and spring wheat.
In western Canada, all wheat area is forecast to decrease.
Spring wheat area is forecast to decrease to 7.1 million
hectares (Mha) in 2004 from 7.4 Mha, due to lower forecast
prices. Prices are expected to be pressured by a 23% increase in
the five major exporting countries wheat stocks. Despite lower
prices and returns expected in 2004-2005, area seeded to spring
wheat in western Canada is expected to stay above 27% of total
area seeded because of crop rotation considerations and due to
the dryness in the western prairies. Area seeded to durum is
expected to increase by about 4% due to the higher returns when
compared with wheat. The CWB pool returns are forecasted to
provide a price premium for No.1 Canada Western Amber Durum
(CWAD) 12.5% protein, compared to No.1 Canada Western Red Spring
(CWRS) 12.5% protein of $10 per tonne (/t) in 2004-2005 versus
$20/t for 2003-2004.
Area seeded to barley in western Canada is forecast to decrease
3% in 2004, to 4.6 Mha, due to a shift from grain to oilseed
production. Off-board feed prices are expected to remain at
2003-2004 levels while malting barley returns are expected to be
pressured by larger world supplies. Good returns from malting
barley and barley's role as a good cash crop and as a major feed
ingredient in western Canada will continue to ensure a large
seeded area. However, despite the lower seeded area compared to
2003, in 2004 area seeded to barley is forecast to be above the
1994-2003 10-year average.
Area seeded to oats in western Canada is projected to decrease
marginally to 2.1 Mha due to significantly lower prices and
slightly higher supplies experienced in 2003-2004. A higher
Canadian dollar and European oat export subsidies have also
contributed to pressuring prices lower.
Area seeded to canola in western Canada, is projected to
increase by 9% to 5.1 Mha due to higher net returns relative to
alternative crops and to the strong prices in 2003-2004. Canola
prices are forecast to fall from the high levels reached in
2002-2003 due to a stronger Canadian dollar and a return to
normal yields in Canada and Australia. However, due to support
from higher US soybean prices, canola prices are expected to
remain relatively strong. Flaxseed area is forecast to increase
by about 9% to 0.8 Mha in 2004 due to good prices in 2003-2004
and relatively good projected net returns for 2004-2005. Prices
are expected to be pressured by a higher Canadian dollar and
higher supplies.
Pulse and Special Crops
In western Canada, area seeded to pulse and special crops in
2004 is expected to decrease by about 4% to 2.63 Mha due to
lower expected net returns than for competing crops or higher
production risks compared to other crops. Area seeded to mustard
seed is expected to decrease by about 20%, while for canary seed
area seeded is forecast to be the same as 2003. Lower mustard
seed prices for all types are expected due to increased
supplies. Canary seed prices are expected to decrease due to
increased supplies. Dry pea area is expected to decrease by 5%
to 1.24 Mha. Supplies are expected to increase due to higher
yields. Prices are expected to be lower due to the higher
supply. Chick pea area is forecast to remain unchanged. Prices
for 2004-2005 are expected to
increase modestly due to lower supply. The area seeded to
lentils is expected to increase by about 5%. Prices are expected
to decrease due to higher production and supply.
Summerfallow area has been steadily declining since 1988,
reaching a low of 3.61 Mha in 2003, because new technology,
especially herbicide, has allowed for continuous cropping. Also,
the increased availability of alternative crops, some of which
are nitrogen-fixing, and the use of crop rotation, has decreased
the producers' reliance on summerfallow. Summerfallow area in
2004 is expected to reach a record low of 3.45 Mha. However,
excessively dry conditions in the spring, coupled with
expectations for higher input cost, may increase summerfallow
area. With expectations for commodity prices to decline, many
farmers may take marginal land out of production, especially in
areas where there is little moisture. Current 2003-2004 crop
year precipitation levels indicate that about two- thirds of the
area in western Canada has received between 60-85% of normal
precipitation levels. Below normal precipitation levels will
increase the need for timely rain during spring for seeding and
proper germination. Forecasts from Environment Canada predict
below normal precipitation levels for the spring of 2004
for most of Alberta and western Saskatchewan with above normal
amounts in Manitoba. Should this scenario occur it is likely
that Alberta and parts of Saskatchewan will again be in a
drought risk situation.
Ontario
Area seeded to winter wheat in the fall of 2003, estimated by
Statistics Canada at 0.3 Mha, is down about 25% from the record
seeded area in 2002. A delayed soybean harvest in 2003 and wet
conditions in the fall
constrained additional seeded area. Winter wheat is a rotational
crop and a source of cash during the summer for many Ontario
farmers, with seeded area largely dependent on fall seeding
conditions. Expected net returns for soybeans, white pea beans,
corn and soft winter wheat are highest. Net returns for hard red
winter wheat are also good.
Area seeded to corn is expected to increase by over 7% to 0.78
Mha in 2004 due to lower area seeded to winter wheat. Despite an
expected 7% higher seeded area, production is forecast to
increase marginally due to lower yields. Average prices in
2004-2005 are expected to remain unchanged at $110-140/t (No.2
Canada Eastern cash in-store, Chatham) as expected higher US
prices will be offset by a stronger Canadian dollar.
Area seeded to soybeans in Ontario is expected to increase by
about 2% due to the decline in area seeded to winter wheat.
Production is expected to increase almost 19% because of an
expansion in harvested area and a return to near normal yields.
Prices for soybeans are expected to decline by $55/t to an
average price of about $280/t (in store Chatham), due to higher
soybean production in the US and a strengthening of the
Canadian/US exchange rate. Despite the decline in prices,
soybean net returns are expected to be higher than for corn.
This is a return to a trend that prior to last year extended for
over six years.
The area seeded to white pea beans in Canada is expected to
increase by just over 5% in 2004. Area seeded to white pea beans
is relatively small, due to higher production risk. Despite the
higher seeded area in Canada, white pea bean production is
forecast to fall due to lower yields and supplies are forecast
to decrease. Coloured bean area is expected to decrease by about
5%. Lower supplies, as a result of lower yields, are expected to
support higher prices for all classes of dry beans.
While the Market Analysis Division assumes responsibility for
all information contained in this bulletin, we wish to
gratefully acknowledge input from the following: Canadian Wheat
Board, Market and Industry Services Branch (AAFC)
The following have been removed from the above bulletin:
1) Canada: Area Seeded 2004-2005 / Crop Budgets (table 1)
2) Canada: Area Seeded 2004-2005 / Crop Budgets (table 2)
This bulletin can be found in PDF
format, with these two tables, at
www.agr.gc.ca/mad-dam/
© Her Majesty the Queen in Right of Canada, 2004 |
