Oil, grain prices now on same track: ag economist
Last Updated: Friday, March 2, 2007 | 7:32 AM MT
CBC News
Prices for grains and oilseeds have been steadily rising over the past year — and western Canadian farmers can thank high oil prices and the biofuel industry, a Saskatoon economist says.
Richard Gray, an agricultural economist at the University of Saskatchewan, says things have changed dramatically since a year ago when farmers were looking at grain prices that didn't pay their bills.
But by late 2006, wheat futures were trading at 10-year highs.
Gray thinks high grain prices will likely stay around for some time, because for the first time in history, grains and oilseed prices are tied to the price of oil thanks to ethanol and other biofuels.
Hundreds of ethanol distilleries are operating or are under construction in North America at the same time crude oil prices have surged above $60 US a barrel.
Many of the U.S. ethanol plants are using corn, which has pushed up prices for that crop.
Corn isn't a major crop on the Canadian Prairies, but analysts believe the surge in corn has pulled other crop prices along with it. Part of the reason is that as corn becomes more expensive, consumers seek alternative crops, like wheat, and the demand for them rises.
Ethanol is being touted as a replacement fuel for gasoline. And biodiesel, which can use canola, is being used as a substitute for petroleum-based diesel.
Major shift in thinking
Gray says it's a major shift in thinking that for the first time in history, prices for grains and oilseeds — wheat, barley, canola, flax — are tied to the price of oil.
"You didn't need to look at the price of oil when you were trying to figure out what the prices of wheat was or the price of canola," he said. "Now you have to look at it very carefully. And when that oil price changes you have to think of what implications that is going to have for the agricultural sector. "
Fortunately for western Canadian farmers, the trends have all been in the right direction, he said.
"The price of oil in the world is such that it's provided a lot of new demand and a lot of strength in the world grains and oilseeds prices," he said. "So these high prices that we see now may to some extent stay around as long as energy prices stay high."
The impact of higher oil prices is being felt on the farm in a number of ways, Gray says.
"We've already seen feed grain prices and wheat prices move up significantly from a year ago. And at these higher prices land rents have gone up. Farmers believe they can make more money at these prices so it's certainly better than it was a year ago."
How much of that extra income farmers get to keep will depend on how much prices for inputs like seed, chemicals, machinery and fertilizer go up, Gray said.
