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The World's Hottest Commodities Are In Your Cereal Bowl

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The World's Hottest Commodities Are In Your Cereal Bowl
JOE FRIESEN AND MARCUS GEE
February 16, 2008


It doesn't matter what you farm, times are good for anyone producing food. 'Milk is the new oil,' crows one strategist, responding to a profound change sweeping world markets. Signs of the boom are everywhere, from increasing tractor sales to record cash receipts. Joe Friesen reports from the Prairies and Marcus Gee from Mumbai

WINNIPEG and MUMBAI -- Back home in Canada, Lloyd Affleck raises wheat, barley and pulse crops on his spread near Beechy, Sask. (pop. 243), on the cold prairie between Swift Current and Saskatoon. Yesterday, though, found him standing in the steamy port of Mumbai, India, watching yellow peas from Canada come off a ship.

Barges brought the peas to shore. A crane scooped them out of the barges and into a waiting truck. The truck dumped them into a pile the size of half a city block and the height of one man standing on another's shoulders. Sweating, barefoot stevedores poured them into bags and loaded them onto other, smaller trucks. The trucks then drove them off to Mumbai warehouses, bound for the homes of 1.1 billion Indians.

Demand from hungry, growing Asia is helping fuel one of the biggest booms Western Canadian farmers have seen in years.

India's consumption of pulses - yellow peas, lentils, chick peas, green peas - has doubled in a year. In a country where millions are strict vegetarians, pulses are an essential protein source that go into the preparation of dal, which is cooked every day in millions of homes. India's struggling, still backward farm industry can't keep up with the demand.

The price of yellow peas has soared to about $600 a tonne from about $400 in just two months. Wheat sales are up too, thanks to New Delhi's decision to ease health regulations that choked off Canadian imports.

"It's a huge opportunity," said Mr. Affleck, who represents growers and traders as the chairman of Pulse Canada.

He is leading a four-member group around India to see how Western Canadian farmers can take advantage of the situation. The short answer? With just about everything.

At a time when much of North America is sliding headlong toward recession, grain growers aren't expecting to feel much pain. Instead, they're in the midst of what could be a profound change that's sweeping world markets, sending food prices soaring in parts of the world and threatening to further derail the Doha trade talks as countries introduce export tariffs to keep domestic crops in home markets.

"It's not our part of the world that changed things, it's the millions of people over there that are no longer content to get along with a bowl of rice and a few loaves of bread. They're adding meat and dairy to their diet and we aren't producing enough feed grains, enough vegetable proteins, to supply their need," said Donald Coxe, global portfolio strategist for Bank of Montreal.

"Milk is the new oil. Milk demand worldwide is rising faster than oil demand. That's because of the new Asian middle class."

On the snowy main streets of farm centres from Moose Jaw to Minnedosa, Man., the signs of the emerging boom are everywhere.

Farmers are snapping up $300,000 combines and new seeders at a pace not seen in years. Even at twice last year's price, fertilizer dealers are filling orders months in advance of delivery, and nearly everyone seems to be making plans to get the latest global positioning system technology for their tractors. Land is being bought and sold at prices that set the neighbours talking, and that rarest of words, optimism, is a hot topic on coffee row.

Net income for the average Canadian farm is expected to rise 16 per cent this year, according to Agriculture and Agri-Food Canada, and crop receipts are expected to be nearly 40 per cent higher than in 2006.

"Western Canadian farmers, unless they have an all-out crop failure, are going to have the biggest year in their history," Mr. Coxe said.

SUPPLIES FALLING, PRICES RISING

Mr. Coxe said the rise in living standards in India, China and other parts of the developing world, as well as the sudden explosion in demand for corn to make ethanol for gasoline in the U.S., have put a squeeze on markets that's making all cereal crops and vegetable proteins more expensive.

World grain supplies are at their lowest point since the 1970s, and the U.S. Department of Agriculture released figures last week suggesting they will hit their lowest level since 1948.

The biggest reason for this shift is the ethanol boom, which now eats up about 20 per cent of the U.S. corn crop. Corn and soybeans are the major feed grains given to cattle, hogs and fish, which are then converted to meat, dairy and other forms of animal protein. As living standards rise in Southeast Asia, India and other parts of the world (India and China alone are adding about 50 million people a year to their middle classes), consumers seek out new and more expensive proteins, they consume more convenience food and they add more calories to their diet. And changes in diet tend to be permanent.

So much in the world market now hinges on the price of corn that Mr. Coxe started looking into the history of U.S. corn crops. He consulted the work of Elwynn Taylor, a climatologist at Iowa State University who studies tree rings to reconstruct historical rainfall. Prof. Taylor argues that the Midwest has now had 19 consecutive years without drought, exactly the average time between Midwestern droughts for the past 100 years. In 16 of the last 17 droughts, three factors have lined up as they have this year: a drought in the preceding year in the Carolinas and Virginia, a La Nina weather year and a period of 19 years since the last drought.

"So the way I sum it up," Mr. Coxe said, "is the world is roughly in the position of a family that gave their son who was going to Las Vegas all the money they had and told him to put it on the dice table. He has rolled four consecutive sevens. He has left all the money on the table and now he's rolling the dice again."

If this is the year drought hits the Midwest, he said, expect prices for all grains to go through the roof, sparking protectionist battles as each country tries to restrict trade and hold on to its own commodities. China has already slapped 20-per-cent export duties on wheat, barley and oats and is increasing subsidies to its grain farmers.

Next to nuclear war, food scarcity is the biggest threat facing the world today, Mr. Coxe said.

"We are facing the real possibility of the worst global food crisis for which we have records.

"When people ask me what's the biggest threat facing China - it's food price inflation. The consumer price index in China (6.5 per cent) is now the highest rate in many, many years. If you take the food inflation out of it, their inflation rate is closer to 1 per cent."

The United Nations Food and Agriculture Organization said this week that the rising price of cereals is "a major global concern," particularly for poor countries. It said 36 nations are facing a "food crisis," mainly in Africa, South Asia and Central America.

Abdolreza Abbassian, secretary of the intergovernmental group for grains at the UN's FAO, said the market is likely to remain fragile for the next few months. He played down the significance of India and China in this short-term price spike, placing most of the blame on ethanol production. He added, however, that in the long term the gradual process of population and income growth in those countries will drive global demand upward.

"Current indications for the next few years are that prices will remain high, and even beyond that it is increasingly unlikely to think about the very low prices of the past," he said. "In that sense, farmers in Canada, like any farmers around the world, will be the ones who are happy about it."

Banner year in the works

Analysts agree that if the weather is favourable, Canadian grain growers should enjoy their best year in decades.

Hard red spring wheat, the variety grown in the millions of tonnes on the Canadian prairies, typically trades in the $4 (U.S.) to $6 range. It hit an all-time record Thursday of $18.53 a bushel on the Minneapolis grain exchange. Durum wheat, another popular variety grown in Canada that's used to make pasta, is also trading at record levels, and canola is not far off.

The market was lit on fire in mid-January after the USDA released reports on corn, wheat and oilseeds, indicating that supply for all three would be tight this year. But Patricia Mohr, vice-president of economics and commodity markets specialist at Bank of Nova Scotia, said she suspects current prices reflect a seasonal high, and that they will come down a little once the bulk of crops are planted in the spring, just not to previous low levels.

"Much higher prices are going to be a new normal," she said.

Farmers will be doing all they can to maximize their production this year, seeding land that was summer fallow in order to stretch their capacity.

Rob Brunel, 32, farms grains and oilseeds near Ste. Rose, Man. Like many farmers, it's unlikely he'll get carried away with his optimism, but he's willing to admit that things are looking good.

He was an infant the last time prices were this high, but he knows a lot can go wrong between now and the fall harvest.

"The trouble is you have to get that crop in the bin. The fear is to see these prices and then to have a crop failure," Mr. Brunel said. "Nobody ever thought they could get rich farming and that hasn't changed."

The jump in crop prices has been accompanied by a 150-per-cent increase in fertilizer cost, a boon to companies such as Agrium Inc. and Potash Corp. of Saskatchewan that have seen their stock prices soar, but has cut into farmers' profits. Diesel fuel has also shot up in the past year.

Still, Mr. Brunel said he has more money than he did a year ago, most of which he intends to invest in his farm, part of an economic spinoff that is helping to rejuvenate suppliers and retailers in parts of rural Western Canada.

"When growers have more capital, they tend to invest in crop inputs to maximize their yields, and our sector has been the major benefactor of those investments," said Dave McKay, spokesman for the Canadian Association of Agri-Retailers. "It appears that this isn't just a phase. It's a whole new reality we're dealing with, and we're just getting a handle on that."

The banking connection

Farmers are in many cases going to the banks to fund expansion. But Bob Funk, vice-president of agriculture services at Scotiabank, said his company isn't throwing extra people at agriculture to capture more business. It's already a sizable chunk of their retail book, with about 80 per cent of those clients taking loans of $250,000 or less. He said it's important to remember that agriculture is cyclical, and the bank has to stay with its clients in good times as well as bad. Mr. Funk grew up on a farm in Snowflake, Man., so he knows better than to get carried away with the hype, he said.

"As a farmer, your view is it's never quite as good as it seems, and it's never quite as bad as it seems," he said. "We don't want to overlend in the really hot times because then you have problems. ... We want to make sure we don't facilitate the client hanging himself out to dry.

"We see growth, we're aggressive about getting growth, but we don't see this as a landslide."

Not everything is rosy in farm country, though, because livestock prices are extremely low. Hog and cattle farmers are feeling the pinch.

Keith Gardner has about 100 cattle and a 1,300-acre grain farm near Virden in southwestern Manitoba. Just feeding the cattle is a little painful these days because they're eating such valuable grain.

"They're not worth much and it's costing me too much to keep them," he said.

He thinks he'll thin their ranks before the summer.

He'd love to be able to expand his grain operation by turning their pastures into fields of wheat, but the ground is only fit to grow a kind of spare grass. Instead he'll squeeze what he can out of land that he should perhaps be leaving fallow, and he'll dip into the cash from his grain business to help keep the livestock afloat.

He's wary of the talk that suggests a new reality has taken hold in world markets and that the rise of India and China will help him prosper for years to come.

"I've been farming since 1977 and we've heard that before. We were told there'd be a shortage of grain to feed the world, but it's never really happened," he said. "It'd be nice to believe that, but they've been wrong before, haven't they?

The old saying in farming is that there's no cure for high prices like high prices. Farmers will grow too much of the stuff and prices will come back down again. Still, Mr. Gardner says he's very optimistic for the short term.

"It makes you nervous, though," Mr. Gardner said. "Even as a kid I've watched what was a beautiful crop get burned off in the sun. July can be very cruel."

Bob Bjornerud, Minister of Agriculture in Saskatchewan, said crop producers are wary because they've waited so long for good news they can scarcely believe their fortunes are about to change.

By a conservative estimate, agriculture makes up about 15 per cent of the provincial economy, he said, and in the rural towns that supply producers, everything is starting to pick up.

"There's just a good feeling everywhere I go," he said. "What we're seeing from machinery dealers out here - whereas machinery hasn't been a big concern because farmers haven't had the dollars to buy - in some areas you can't find machinery on the lots because farmers are already taking that optimism and replacing their machines that have been there 10 years."

Investors are snapping up Saskatchewan farmland, which after 15 years of increases in value of about 1 per cent a year has recently jumped 15 per cent in some places. Neil Sivertson, director of agriculture at Wellington West Capital Markets, personally bought nearly 5,000 acres of Saskatchewan farmland as an investment, renting the land back to local farmers in a crop-share arrangement.

"I come from three generations of farmers and I saw the value as extraordinarily compelling. It's been great," Mr. Sivertson said.

Older farmers who have wanted to get out of the business for years finally have an interested market, and aggressive younger farmers are buying that land to expand their operations, he said.

From an investor's perspective, he added, this boom looks as though it could be sustained for dozens of years, thanks to the demand for protein.

"If you're looking for the view from 100,000 feet, there is no shortage of capital that understands the sustainability of current commodity prices. They're real, it's going to persist for quite some time and guys are looking for ways to take advantage of the increased economics at the farm level," Mr. Sivertson said.

"People that live on the farm like to push excess capital or returns back into the farm. Whether that's buying new tractors with GPS equipment or grain storage bins with aeration capabilities, you're seeing the effective prices on all these things moving up fairly rapidly."

http://www.theglobeandmail.com/servlet/story/LAC.20080216.RCOVER16/TPStory/Business

**Happy Trading**

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