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An Analysis and Comparison of Selected Canada - United States Input Costs

Introduction

Although much has been written about the spectacular increases in grain prices that have occurred in recent months, comparatively little has been written on the substantial increases in certain farm input costs that have rendered the bottom line of many farming operations less rewarding than might have been expected. Global factors linked to the normal interaction of supply and demand on world markets could certainly explain, at least in part, this rise in input prices. However, domestic factors related specifically to the Canadian market pose a challenge to the smooth operation of competitive markets and may also have played a role. In this report, the Standing Committee will present the background to the increase in input prices on Canadian farms, examine global and domestic factors that may account for this phenomenon, and make recommendations on mitigating the effects of increased input prices for Canadian farmers. Finally, in order to better assess if the lack of competition in Canada could be a contributing factor, the Standing Committee commissioned a study on Canada – U.S. farm input prices differences from the Thomsen Corporation. The Thomsen Corporation study is attached to this report.

Background

Table 1 shows average annual increases in various input prices from 2002 to 2006. The overall Farm Input Price Index (FIPI), as compiled by Statistics Canada, increased on average by 2% per year during that period. This rate was in line with concurrent increases in the consumer price index, which stood at 2.2% annually. However, because some productions are more sensitive to certain cost elements than to others, the increase in the overall farm input price index from 2002 to 2006 should be interpreted cautiously; that is to say, it is prudent to examine price increases with respect to the various components of the index. A glance at the evolution of the FIPI components between 2002 and 2006 reveals two notable elements that have increased more than the overall FIPI: fuel and fertilizer (see underlined cost components in Table 1).

Table 1 — Average Annual Increase between 2002 and 2006 in FIPI Components

FIPI Components

Average Annual Increase, 2002-2006

FIPI - Overall

+2.0%

Machinery

+4.1%

Fuel

+13.9%

Maintenance

+1.4%

Seeds

-0.1%

Fertilizer

+7.6%

Pesticides

+2.9%

Herbicides

+2.6%

Artificial Insemination

+1.3%

Veterinary Services

+4.3%

Supplies and Services

+2.1%

Electricity

+3.6%

Telephone

+0.1%

Custom Work

+1.6%

Heating Fuel

+16.6%

Hired Farm Labours

+2.7%

Property Taxes

+2.2%

Interest

+1.1%

Source: Statistics Canada

Given the rate of increase in oil and fertilizer prices in the very recent past, FIPI data for 2007, once available, will likely show that the trend toward higher input prices was even stronger in 2007.

Paralleling the increase in oil and fertilizer prices was the spectacular increase in grain prices over the last two years. Figure 2 illustrates the increase in corn and barley prices in 2007. These two crops are widely used as production inputs in Canada in the raising of hogs and cattle.

Figure 1 — Grain Boom: the Case of Corn and Barley

Figure 1 — Grain Boom: the Case of Corn and Barley

Source: CANFAX

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Although global factors are certainly propelling the boom in fuel, fertilizers and grain prices, certain domestic factors may also have played a role, as the following sections will demonstrate.

A) Increase in Input Prices: Global Factors

The term “global factors” refers to influences that shape the movement in supply and demand on world markets. Perhaps the best way to identify the global factors behind the increase in input prices is to take a historical perspective. Figure 2 provides an annotated representation of the evolution of monthly prices for grains, fertilizers and energy (termed “fuel and related products and power” in the graph) in the United States from 1968 to 2008. The evolution of US prices (represented in the figure in US dollars to avoid the exchange-rate effect) is used as a proxy for world prices. As Figure 2 shows, the synchronous movement of grains, fertilizers and energy prices is not a new phenomenon. Although the correlation is by no means perfect, there has been a tendency over the years for these three cost elements to move in the same direction for a period of time. This can be explained by the interaction of supply and demand.

Figure 2: Evolution of Energy, Fertilizers and Grain Prices

Figure 2: Evolution of Energy, Fertilizers and Grain Prices

1. Supply Side: The Domino Effect of Energy Costs

Text Box: I know there are demand and cost increase factors, but the factor that has probably caused a sudden increase in input costs is undoubtedly the cost of a barrel of oil or the cost of energy, which has resulted in an increase in the cost of other inputs, be they fertilizers, agricultural fuel and pesticides, because their production entails a very high energy cost.

Gilbert Lavoie, Economist, Research and Agricultural Policy Branch, Union des producteurs agricoles,
Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –9:20, 2nd Session, 39th Parliament, Ottawa, 5 February 2008. 































The grains and fertilizer industries are strongly influenced by energy prices. First, the production of fertilizer — nitrogen in particular — is a highly energy-intensive process. The cost of natural gas is usually believed to account for 70% to 90% of the production cost of ammonia, and anhydrous ammonia is the source of nearly all nitrogen fertilizer. Potash and phosphate are extracted through mining operations that typically consume significant quantities of energy. Therefore, the price of fertilizer has historically been heavily influenced by energy prices. Similarly, as a proportion of their operating cost, energy costs are the highest for grain producers. For example, fuel, fertilizer and electricity account for approximately 50% of the operating costs of wheat and corn growers. The cost of pesticides also has an important energy component. Grain growers would typically be the first to feel the pinch of high energy and fertilizer prices. Therefore, runaway energy and fertilizer prices, without a corresponding increase in grain prices, could significantly damage the bottom line of grain farmers. Through a supply response from farmers eventually cutting back on production, grain prices could inflate as a result of higher energy prices.

2. Demand side: Improving Global Economic Conditions and the Impact of Biofuels

Text Box: For years, on the food side, we've had burdensome supplies in the EU and the U.S., and I think as we look around now there has been--for many, many years people have talked about this--how many days the food supply is inching down, down, down. It doesn't take much in the increase in demand and suddenly these food supplies, the stocks, reserves, are gone, and as a result of that demand we're seeing grain prices going up. With the grain prices going up, you see people wanting to increase production, as for example, in the U.S. where corn acres have gone up about 10 million acres in the last couple of years. Fertilizer-intensive...there's a huge demand for fertilizer down there. Here are some rough numbers for you. From India we've seen increases of imports of urea fertilizer from one million to six million tonnes, just in the last three years. We see Brazil, estimated at another 25% increase in the coming years. China is increasing imports. Mr. Richard Phillips, Executive Director, Grain Growers of Canada. Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –9:10, 2nd Session, 39th Parliament, Ottawa, 5 February 2008.

 

Increasing demand for energy is often accompanied by an increasing demand for grains. One simple reason for this is that increasing global demand for energy is often the symptom of a global improvement in economic conditions. This increase in economic wealth in turn also puts upward pressure on global demand for protein (from grains in particular). These demand-side factors, which have been particularly evident in some developing countries in Asia in the recent past, are certainly an important aspect of the increase in energy and grain prices in the last few years.

 

 

 

Still on the demand side, the development of biofuel production may have made the link between grain and energy prices more direct. An increase inText Box:  There are three major drivers for the surge in world fertilizer demand. First, India, China and Brazil are leading as the largest contributors to growth. Ninety per cent of the growth in global nutrient demand is from developing countries. Other factors are world cereal production and consumption on the rise and corn-based ethanol production in the U.S. Mr. Roger Larson, President, Canadian Fertilizer Institute. Standing Committee on Agriculture and Agri-Food, Evidence, No. 21 –9:15, 2nd Session, 39th Parliament, Ottawa, 11 March 2008. energy prices would typically put upward pressure on the price of ethanol (which, typically, is strongly correlated with energy prices in general), thereby increasing the profitability of ethanol production. This increase in profitability encourages ethanol plants to expand production, which ultimately pushes up demand for grains and puts upward pressure on grain prices.

This increasing demand for grains eventually generates a correspondingly strong demand for fertilizer world wide. Not surprisingly, global consumption of the three main categories of fertilizer has shown important increases since 2001. Again, although data are not yet available, we might reasonably expect the percentages shown in Table 2 to be even higher for 2007.

Table 2 — Increases in apparent global consumption of fertilizers, 2001 to 2006

Fertilizers category

% increase from 2001 to 2006

Ammonia

+17.2%

Phosphate rock

+15.2%

Potasch

+14.1%

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3. Discussions and Recommendations on Global Factors

The Committee notes the fundamental role played by energy in driving up input prices. Trying to predict the future direction of energy prices is no small matter. A collapse in global energy prices would likely be the result of a collapse in demand for oil, natural gas, or other energy sources, or a significant increase in supply, or both. A collapse in energy demand would likely be the result of a severe economic recession, which would likely imply a collapse in global demand for commodities, including grains and fertilizers. This would obviously have far-reaching implications, not only for grain prices, but also for the Canadian economy. A collapse in energy demand would therefore likely reflect a situation in which the cure is worse than the disease for Canadian farmers.

An increase in energy supply in the context of steady economic growth would be the preferred situation for farmers, if such an increase succeeded in curbing energy prices. However, such a scenario could have unintended consequences on grain demand and prices through its effect on biofuel prices. A collapse in energy prices would likely imply a decrease in ethanol prices. Such a scenario, if grain prices remained high, would spell very difficult times for ethanol producers. This could ultimately lead them to cut back on production, which would decrease demand for grains. The outcome on grain prices of this scenario would therefore be uncertain.

Text Box:  There's a further complication in fertilizer prices. I think everybody knows that grains and oilseed farmers have a little more cash from 2007, but they had a deep hole and paid a lot of bills in fall 2007. So if a farmer couldn't afford to buy his fertilizer in the fall because he paid other bills, he will have to wait until the last possible moment in the spring before he buys fertilizer. Mr. Bob Friesen, President, Canadian Federation of Agriculture, Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –10:00, 2nd Session, 39th Parliament, Ottawa, 5 February 2008.Of particular note is the fact that some countries have decided to tackle global market fundamentals head-on by imposing a tax on certain of their exports. The goal of an export tax is to discourage exports, thereby creating an artificial excess production on the domestic market and driving down domestic prices. The best-known example is perhaps China, which signalled its intention in December 2007 to levy an export tax on grain in order to rein in surging domestic prices. Since Canada is an important exporter of fertilizers, it would be difficult for the Canadian government to impose an export tax to slow surging domestic fertilizer prices. Such an intervention could jeopardize Canada’s reputation as a reliable commodity supplier and, moreover, could deprive the Canadian economy of significant export revenues, creating a situation that could be even more detrimental than high fertilizer prices.

Text Box:  I need to underline to this committee that at that time of year it is difficult to buy next year's inputs, because you haven't even paid the current year's inputs. So how the heck do you think we're so cash rich that we can actually buy two years of inputs at the same time? Mr. Leo Meyer, Director, Grain Growers of Canada, Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –10:40, 2nd Session, 39th Parliament, Ottawa, 5 February 2008.Numerous witnesses who testified before the Committee indicated that timing the purchase of certain inputs could save significant amounts of money for farmers. Fertilizers in particular are subject to a markedly seasonal demand pattern that can cause drastic price swings within a year. Timing the purchase of fertilizers to coincide with the period in the year when prices are bottoming could be of significant benefit to farmers. This raises the question of whether modifications to current programs, such as the Cash Advance Program, are required to permit the timely purchase of fertilizers. Therefore:

Recommendation 1

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada review the current functioning of agricultural programs to see how they can be used, or modified, to better allow farmers to time the purchase of their most important needs when prices are most attractive.

Recommendation 2

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada communicate with farmers the outcome of this review by providing concrete examples of how current programs could be used in order to better time the purchase of their production inputs.

B) Increase in Input Prices: Domestic Factors

Domestic factors refer to all the elements potentially related to the increase in farm input prices that arise from the Canadian context and are therefore not necessarily linked to supply and demand conditions on world markets. Witnesses who appeared before the Committee emphasized two broad categories of domestic factors: the level of competition in farm supplies industries, and regulatory issues. The following sections will, accordingly, deal with both aspects.

1. Domestic Factors: Level of Competition in Farm Supplies Industries

Questions surrounding the level of competition in a given industry relate to the level of concentration, the lack of new entrants, and the impact these factors have on prices. With respect to farm supply industries, these elements have been an issue for farmers for quite some time. They were made more acute after the publication of data by Agriculture and Agri-Food Canada (AAFC), among others, indicating that a significant price difference has existed for fertilizers and fuel between Canada and the United States in the last two years. Table 3 and 4 show the data published by AAFC for 2007 in two border regions.

Table 3 — Comparison of Selected Average Fertilizer and Fuel Prices
between Manitoba and Minnesota/North Dakota, summer 2007

 

Manitoba

Minnesota/North Dakota

Difference

Nitrogen (Can $/Tonnes)

     

Anhydrous Ammonia
(82-0-0)

864.92

624.52

38.5%

Urea (46-0-0)

590.11

525.65

12.3%

Phosphate (Can$/Tonne)

     

MAP (11-52-0)

616.06

504.55

22.1%

Potash (Can $/tonne)

     

Potasch (0-0-60)

313.87

302.35

3.8%

Fuel (Can ¢ /litre)

     

Diesel

76.06

75.34

1.0%

Gasoline
(regular unleaded)

91.13

75.3

21.0%

Source: Farm Income, Financial Conditions and Government Assistance, Data Book, September 2007, p. 26.

Table 4 — Comparison of Selected Average Fertilizer and Fuel Prices
Between Ontario and Michigan/Ohio/Indiana, June 2007

 

Ontario

Michigan/Ohio/Indiana

Difference

Nitrogen (Can /Tonnes)

     

Anhydrous Ammonia
(82-0-0)

749.2

689.33

8.7%

Urea (46-0-0)

523.09

550.21

-4.9%

Nitrogen Solution
(UAN, 28%)

350.1

359

-2.5%

Ammonium Nitrate

455.76

476.92

-4.4%

Phosphate (Can$/Tonne)

     

MAP (11-52-0)

518.26

537.01

-3.5%

DAP (18-46-0)

515.65

557.15

-7.4%

Triple Super (0-46-0)

505.43

482.72

4.7%

Potash (Can $/tonne)

     

Potasch (0-0-60)

384.48

318.59

20.7%

Fuel (Can ¢ /litre)

     

Diesel

82

72

13.9%

Gasoline
(regular unleaded)

99

86

15.1%

Source:  Farm Income, Financial Conditions and Government Assistance, Data Book, September 2007, p. 26.

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Since the North American fertilizer market is fully integrated, one would expect the price difference between Canada and the United States to be small, reflecting mainly the Text Box:  Today's reality is not that small operators can enter the field. What we let happen in the past few years is very simple: a dramatic concentration process. If people were sleeping through that process, welcome to today's reality. The fact is that the concentration process has now brought us here where jurisdictional and regional governments are not able to make much of an impact any more on some of those things. Mr. Leo Meyer, Director, Grain Growers of Canada, Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –10:00, 2nd Session, 39th Parliament, Ottawa, 5 February 2008.cost of transportation. Given the price differences reflected in Tables 3 and 4, however, some witnesses expressed their view that these differences could be a symptom of a high level of concentration together with a lack of new competitors — and, therefore, a lack of competition in the fertilizer industry in Canada. A related issue echoed by some witnesses is that lower prices in Canada triggered by a strengthening of the Canadian dollar is not a determinant of farm output prices only, but also of farm input costs. This observation also puts into question the prevailing level of competition in farm input supplies industries in Canada. The lack of a healthy level of competition does not necessarily mean that there is blatant collusion between industry players. Rather, it could mean, as one witness phrased it, that “innocent collusion” is taking place. This phenomenon stems not from the willing behaviour of industry players, but simply from the structure of the industry.

Text Box: Over the years, many of my colleagues have publicly stated that if farmers are required to sell their commodities at world prices, then they must have the right to purchase their inputs at world prices as well. Mr. Ray Orb, Member of the Board, Saskatchewan Association of Rural Municipalities, Standing Committee on Agriculture and Agri-Food, Evidence, No. 20 –9:15, 2nd Session, 39th Parliament, Ottawa, 6 March 2008.The Standing Committee notes that differences in taxation, particularly for diesel and gasoline, could explain — at least in
part — price differences between Canada and the United States. The Standing Committee also notes the criticism formulated by some witnesses on the type of study shown in Table 3 and 4 as a “one point in time” snapshot of fertilizer prices. These witnesses pointed to another publication by AAFCText Box: One thing that has made farmers angry is reports that fertilizer prices are higher in western Canada than they are in neighbouring U.S. states. Those reports are often based on anecdotal evidence or small samples taken just before spring seeding, when supply/demand conditions can be frankly chaotic. Mr. Roger Larson, President, Canadian Fertilizer Institute, Standing Committee on Agriculture and Agri-Food, Evidence, No. 21 –9:10, 2nd Session, 39th Parliament, Ottawa, 11 March 2008., dated March 30, 2007, which indicates that “Statistical Analysis has confirmed that average fertilizer prices in Canada and the U.S. border area were not statistically different for urea, mono-ammonium phosphate and muriate of potash over the 1993-2006 period” [1]. A March 2008 update of this publication did not contain a comparative analysis of Canadian and U.S. fertilizer prices. With respect to the impact of the Canadian dollar on input prices, one witness noted that a lag in input price adjustment could be justified by the fact that inventories were purchased before the rise in the exchange rate occurred.

Based on the above, the Standing Committee endeavoured to pursue the Canada-U.S.price difference analysis in order to bring further evidence as to whether the lack of competition in farm supplies industries in Canada could be a determining factor. The Standing Committee hence commissioned a study on Canada – U.S. farm input prices differences from the Thomsen Corporation. The Thomsen Corporation study is attached to this report.

Text Box: This is the kind of data that we shouldn’t have to commission farm organizations to get. This kind of data, if it was collected and published by Stats Canada and the government, would really help us as farmers to bargain with those Canadian companies. Mr. Darrin Qualman, Director of Research, National Farmers Union, Standing Committee on Agriculture and Agri-Food, Evidence, No. 20 –9:55, 2nd Session, 39th Parliament, Ottawa, 6 March 2008.A strong consensus existed among witnesses that better information on input prices could be of significant benefit to Canadian farmers and could in itself help bring competitive pressure on market players in farm input supplies industries. The Committee therefore sees as highly useful the fertilizer and fuel price comparisons published by the AAFC in its Data Book “Farm Income, Financial Conditions and Government Assistance” and would encourage the AAFC to expand this type of input price comparisons between Canada and the United States. Therefore:

Recommendation 3

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada expand the input price comparisons coverage included in its Data Book “Farm Income, Financial Conditions and Government Assistance” by considering increasing the frequency of the price comparison and the number of border regions under analysis, as well as publishing results in a timely fashion on the AAFC website.

The Standing Committee commends the professionalism and quality of the work embodied in the AAFC Bulletin on farm fuel and fertilizer expenses. However, the Standing Committee thinks it would be valuable for the annual comparative analysis of fertilizer prices between Canada and the United States to become an ongoing part of this study, particularly in these times when the issue is taking centre stage. Therefore:

Recommendation 4

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada includes, as a recurring theme, the comparative analysis of fertilizers prices between Canada and the U.S. in its bulletin “Canada: Farm Fuel and Fertilizer Expenses”.

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2. Domestic Factors: Regulatory Issues

Paralleling the question of whether competitive conditions, or the lack thereof, could explain price differences between Canada and the United States, is the question of whether the Text Box:  Overall, the regulatory regime for the manufacture of feed is out of date. This regime does not allow the feed industry to respond quickly to crises situations, such as the current high ingredient costs. There are a number of low cost ingredients that could, in theory, be imported from the U.S., but they are either not approved or would get held up at the border. Mr. Paul Wideman (Executive Director, Animal Nutrition Association of Canada), Standing Committee on Agriculture and Agri-Food, Evidence, No. 20 –9:30, 2nd Session, 39th Parliament, Ottawa, 6 March 2008.regulatory regime related to farm inputs could put Canadian farmers and other agri-food industry stakeholders at a competitive disadvantage. The Standing Committee notes that this is a recurring theme in many different areas. For example, a November 2007 motion from the Standing Committee already called for a full review of all inspection fees charged by the Canadian Food Inspection Agency[2]. Furthermore, the last report of the Standing Committee recommended that the Minister of Agriculture and Agri-Food conduct a complete review of regulatory measures susceptible of putting the Canadian meat industry at a competitive disadvantage[3]. This type of concern is shared by all agri-food industry stakeholders. With specific regard to farm input supplies industries, these concerns range from a regulatory regime for the manufacture of feed that is out of date, the slow and costly process for registering new pesticides and animal nutrition products, and the prohibitive costs associated with site security and safety regulations for agri-retailers. Therefore:

Recommendation 5

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada (AAFC) expand its review of regulatory measures susceptible of putting the Canadian meat industry at a competitive disadvantage to include all farm input related industries, such as feed products and pesticides manufacturers, as well as agri-retailers. AAFC should also report back within six months to the Committee on the results of this comprehensive review.

Furthermore, the Standing Committee recommends that any additional costs resulting from these regulatory measures should be covered by the appropriate Departments, and not only by Agriculture and Agri-Food Canada.

The Standing Committee is of the belief that these higher regulatory compliance costs, whether officially assigned to farm input manufacturers or to agri-retailers, are ultimately Text Box: What we’re talking about is allowing fair competition, actual competition, on inputs as much as our farmers are required to compete on their outputs. Glenn Caleval Vice-President, Farmers of North America Inc., Standing Committee on Agriculture and Agri-Food, Evidence, No. 12 –9:30, 2nd Session, 39th Parliament, Ottawa, 5 February 2008.passed on to farmers through higher input prices. In this regard, the Standing Committee is particularly sensitive to the argument put forth by growers as to the potential decreasing effect on input costs of allowing the Own Use Import (OUI) Program to run at the same time as the Grower Requested Own Use (GROU) program. A motion already passed by the Standing Committee on December 12, 2006 on this issue is aimed at maintaining the OUI program for two more crop years[4]. The Standing Committee notes that the Pest Management Regulatory Agency (PMRA) also considers this an option: it states on its website that “PMRA will re-open the OUI process if pesticide manufacturers are not willing to provide the information necessary to process GROU applications.”[5] The Committee wishes to build on its previous motion by expanding its scope. Therefore:

Recommendation 6

The Standing Committee on Agriculture and Agri-food recommends that the Own Use Import Program continue in its existing form so as to ensure that farmers have the opportunity to access these products in a price competitive manner in order to enhance competitiveness of the Canadian agri-food sector.


[1]       Canada: Farm Fuel and Fertilizer Expenses, Bi-weekly Bulletin, Agriculture and Agri-Food Canada, March 30, 2007.

[2]       Motion carried by the Standing Committee on Agriculture and Agri-Food, Minutes No. 2, 39th Parliament, 2nd Session ,Ottawa, 19 November 2007.

[3]       See Recommendation 5 in Report on the Beef and Pork Sector Income Crisis, Standing Committee on Agriculture and Agri-Food, Chair, December 2007, 39th Parliament, 2nd Session.

[4]       “That the Minister of Health responsible for the Pest Management Regulation Agency maintain the existing own use program for the next two crop years while working toward the implementation of a better and more producer-friendly Grower Requested Own Use Program”. Minutes of Proceedings, Meeting No. 33, Tuesday, December 12, 2006.

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