I think there’s a trend here

 

 

I can’t give any advice about buying fertilizer but I don’t see anything on that chart that would make me rush out for yearend speculative buys.  If I needed the tax expense phosphate looks like the better bet.

But that’s free (non)advice and probably worth exactly what it cost you.

(later)

The chart above was originally posted in early December.  FWIW I have updated it to the 2nd week in January. 

Also since I made the initial post Mosaic has announced Phosphate production cuts and Potash has temporarily closed one mine.  As I have said many times, P & K are in strong hands – N still trades somewhat like a commodity but P & K pricing is very definitely managed.

I’ve been quiet lately

At times I feel out of touch with western Canadian agriculture and I’ve always believed that if you have nothing to say you should keep your mouth shut.  Or your fingers still as the case may be.

I ran into a nugget of information today though that is worth mentioning.  One of the world reference points for nitrogen pricing is the Arabian Gulf which reflects the importance of supply from that region.  Approximately 1/3 of the world’s seaborne urea exports come out of that region.  Given how unstable the area can be that’s a huge risk for farmers.

So the message is to keep an eye on the mid-East as you make your purchase decisions for 2012.  Urea has come off a long way from its highs of 3 or 4 years ago and the market is soft right now.  But if you take 1/3 of the export supplies out of any market it will tighten up real quick.  The list of traditional exporters doesn’t include any of the countries that we typically think of as anti-western but Iran is a sometime exporter and any one of the Islamic countries could easily turn against the west if public opinion dictated.  The real risk is that some internal crisis such as the one in Libya could disrupt production or exports or both.

The big domestic pricing story is the continued advance of the Canadian dollar against the US dollar.  While that makes your grain harder to sell it also directly reduces the cost of imported inputs.  The more you think the dollar is going to appreciate then the less eager you need to be to lock in a price for next year’s fertilizer.

Might be old news already

Rob Saik posted a link to this U-tube video on his Facebook page and I can’t resist re-posting it. 

 

Young man you are speaking Eskimo to me.

 

When we were in business I was always very careful about commenting on the Wheat Board because you just never know where people are on the issue.  For me it’s always been pretty black and white but maybe I’m too stupid to understand the issues.  This little video takes a cynical poke at some of those issues and it should be required viewing for everyone who thinks the Board is about defending western Canadian farmers.

Where’s the beef?

I’ve had about enough of Brad Wall’s posturing on the Potash Corp deal.  I can’t figure out what he thinks he is going to gain but what he is spouting is pure bullshit.

Potash Corp is a private company largely owned by foreigners.  I think it was the Devine government that privatized it – too lazy to look it up right now.  The company has been phenomenally successful since privatization but it’s not a Saskatchewan company any more than Agrium or Mosaic are Saskatchewan companies by virtue of having mines in Saskatchewan. 

The last time I checked all mining companies in this province are subject to provincial royalties when they extract minerals.  And they are subject to income tax on their Saskatchewan operations.  So what precisely is going to change?  Anyone who wants to own shares in what is presently known as Potash Corp will be able to buy shares in BHP Billiton.  That won’t be a pure Potash Corp play but so what? 

As far as I can tell Brad’s argument has nothing to do with investors and share ownership.  Somehow he seems to be spinning this as a loss of control by the province.  I don’t get it and I don’t think it will happen and furthermore I think Brad Wall is smart enough to know that.  So get off the pot Brad and get on with governing – this fight should be beneath your dignity.

It’s that time of year when fertilizer dealers turn to selling spring delivered fertilizer.  Pay attention to the corn market when you consider buying spring nitrogen.  Nitrogen prices tend to be high on big corn years.  If you believe the runup in corn prices is going to drive corn plantings then it makes sense to lock up your nitrogen sooner rather than later.

Wild ass guesses and speculation

With Agrium’s recent offer to purchase all the shares of Australian Wheat Board there’s all sorts of speculation about what Agrium might do with the grain handling assets.  Its hard to believe that even Agrium would have the hubris to think they could enter the grain business and Viterra appears to be a logical purchaser for those assets.  The apparent logic for North American commentators may simply be a function of our lack of knowledge of the Australian market but leave that alone for a minute. 

Here’s a thought: what if Agrium were to swap the grain handling business in Australia for Viterra’s crop inputs business in western Canada?  It’s not such a wild notion.  Agrium is serious about retail in North America.  Their US retail arms generate more gross revenue than their wholesale operations.  The arrival of Crop Production Services in western Canada signals a long awaited move north of the border but lately that move seems to have stalled.  Rumours have flown about Agrium taking over Viterra’s retail assets and now they just might have something to offer Viterra in exchange.

Miserable wet soggy weather

I just found these two YouTubes of the #1 highway washout.  We’re headed back into Saskatchewan so I’ll get some pix of my own from the east side but here’s what the SW looks like.

 

Ground Level View - #1 Highway Washout

 

Aerial View - #1 Highway Washout

Rental arrangements

I still do a lot of work directly with farm clients.  As I do farm budgets or planning documents I see land rental arrangements and I am often disappointed by the lack of imagination that I see in those agreements.  Very few rental agreements move beyond one of two basic arrangements:

- a fixed dollar amount - “cash rental” agreements

- a percentage of the crop, sometimes with variations involving the landlord sharing in the input costs

There are a lot more possibilities than those 2 basic flavours.  Land rental is a huge cost for most successful farms on the prairies and it deserves a little more attention than it usually gets. 

In the past I have seen some more creative cash rental pricing agreements involving commodity basket prices.  The concept is as flexible as your imagination but essentially it involves a lease that refers to a price that is then determined by some formula that you develop.  That formula might involve canola prices on July, September and January 1, the Wheat Board PROs on Feb. and August 1 and some local pea buyer’s posted price on 2 more dates.  Put them all in a basket, run an average or weight the average and then multiply by some magic factor to arrive at a land rent. 

	Aug	Sept	Jan	Feb	Apr	Jul	Sum	X	Total
Canola		472	580			395	1447	1.5	2170
PRO	278			320			598	.8	478
Flax		573			680		1253	.5	627
Peas	773		902				1675	1	1675
									4950

The table isn’t intended to be anything other than an example.  The final step would be to take the 4950 number from the lower right panel and divide it by another factor.  In this example division by 10 might work but the final divisor could be 7.983131 or whatever other number you and your landlord agree on.  The point is that you can design the formula to fit your farm.  The table above is very sensitive to canola prices because it uses 3 reference canola prices  compared with only 2 for each of the other crops and then it multiplies the canola sum by 1.5. 

Another creative pricing agreement that works well is to base the rent on crop insurance guarantees at a fixed coverage level for the crops you grow.  Again you can weight the average based on your typical cropping pattern and again you multiply or divide the result by some magic number to end up at the final rental price. 

Another possibility that I have seen used less frequently but that could easily be incorporated is to tie input pricing into the formula.  That’s a little more difficult because it is hard to get verifiable pricing but you can likely agree on some mechanism for that.  In that case you will want to ensure that rising input prices lower the rental price.  In the table above you would accomplish that by adding a row for input prices and then dividing your end result by the input factor.  That way a higher input price would lead to a higher divisor which would result in a lower rent.

The important concept to remember is that this is a risk management tool, not a profit maximizing tool.  I’ve seen tenants who go to elaborate lengths to devise formulas that make it look like they are sharing pricing risk but really the goal is just to screw the landlord.  If that’s your goal you might as well get it out on the table and just offer $10 per acre or whatever lowball number makes you feel good.  The concept of risk sharing means that in exchange for the landlord taking some of the price risk when grain prices unexpectedly drop, you are willing to give up some of the gains when prices unexpectedly rise.  Its important as you design a formula that you plug in some possible prices just so you clearly understand ahead of time what impact they might have on your formula price.

Another lease concept that has a lot of merit is to sign leases with rolling terms that are cancelled by exception.  Typically you sign a 3 or 5 year lease today and it expires 3 or 5 years from today.  A lease with a rolling term on the other hand has an anniversary date and continues to roll forward from that date.  So a rolling 3 year term signed today would have an anniversary next June.  At that time if neither the landlord nor the tenant objected the lease would automatically renew for an additional year.  The effect is that as a tenant you know that you have a fixed term ahead of you that you can plan for.  If you want to invest some inputs you don’t have to worry about whether the lease will renew on its anniversary.  The landlord benefits from the security of an ongoing agreement as well because he doesn’t have to worry about you dropping his land in tough times without giving him any notice.

I hope the sun is shining on those of you that are flooded.  Even if it doesn’t immediately get better sunshine makes everything look more optimistic.