Cereal Competitiveness

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Cereal Competitiveness

• Rural Caucus Meeting
• May 31st, 2007

C N Partners Inc.
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Initiative objectives

• Short term
• The identification and prioritization of
  investment opportunities to
• provide lower cost energy in feeding rations
• Feedstocks for the emerging biofuels industry.
• Longer term
• The identification and prioritization of
  initiatives to catalyze cereal industry
  competitiveness.

Revitalize the Cereal Industry moving from a
mature industry to a growth industry
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Background.

• Two main issues identified
• Feeders losing their competitive position
• Producers moving away from cereals
• Research perspective
• Not about a particular cereal crop rather
  overall cereal crop platforms (wheat, barley,
  Oats, Corn, Rye and Triticale)
• Meet existing / new market opportunities
• Improve domestic value added opportunities
• Increase cereals productivity and production
  profitability

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Defining Cereal Competitiveness.
Industrial
Food
Feed

• Functionality, quality and cost to primary
  processor is equal to competitive feedstocks
  (domestic or imported) from other sources in
  those markets you choose to participate in, and
• Providing producer gross margin returns equal to
  or better than competitive crop options and
  provide a minimum of XX / acre gross profit
  over fixed and variable costs.

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Discussion outline

• Overview of cereal production / market situation
• The Competitiveness issues
• Opportunities for the industry
• Moving forward
• General discussion

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W. Canada total cereal acreage and production
trends
Alberta, Sask. and Mb. 000s
Alberta 5 yr average. 13.3 M acres cereals 6.7
M acres wheat 5.0 M acres of barley 1.5 M
oats Corn, triticale, rye lt 150 k
Alberta 5 yr average Cereals 55 of annual
crop production 12.1 MT production 6.5 MT
wheat 4.9 MT barley .75 MT oats Corn, Rye,
triticale lt 100 k
Acreage / Production of wheat, barley, oats, rye,
corn triticale
Source Stats Canada / Alta Ag
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Western Canadian Seeded Area Cereal Production
Utilization
Average of 04/05 and 05/06
Cereal Utilization 04 / 05 - 05 / 06
W. Canada 5 yr average Cereals Prod. 38
MT Domestic 22 MT Exports 16 MT
Alberta 5 yr average Cereals Prod. 12.1
MT Domestic 6 MT Exports 6 MT
Production / utilization of wheat, barley, oats,
rye, corn triticale
Source Stats Canada / AAFC / Alta Ag.
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W. Canada total utilization of Cereals
000s Metric Tonnes (MT)
Alberta Feed Facts Total feed needs 8.5
M tonnes Alta production utilized 6.0 MT Alta
imports 2.4 MT Barley 2.2 MT Corn .2
MT Alta imports 27 of feed requirements
Likely 8 MMT potential opportunity for increased
Domestic Consumption
8 MMT
Alberta - Net 3.7 MT surplus production
Source Stats Canada / AAFC / Alta Ag. ( total
production average of 2003 2006)
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Livestock on farms in Mb, Sask and Alberta trends
Significant expansion Of livestock s
Alberta - Beef 6.7 M Cattle and calves 38 of
CDN total 52 of W. Canada total
W. Canada Facts Cattle s 68 growth Hog s
66 growth
000s
Alberta - Hogs 2.0 M hogs 13 of CDN total 31
of W. Canada total
As of July 1st for cattle, Dec. 31st for hogs
Source Stats Canada / Alta Ag.
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Production / Utilization summary.

• Cereal production is trending down
• Focus of the industry has largely been on food
  markets and exports
• Domestic feed supplies largely a consequence of
• Unselected barley (Malt selector heaven)
• Poor harvests reduced quality
• Industrial market (ethanol) is emerging -
  development is predicated on low cost feedstocks.

Historically cereal production was commodity
based, trending over time to more domestic
utilization
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Competitiveness Issues
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W. Canadas cereal production and marketing costs
are high
Cereal Price Index Vs Inflation
Alberta Historical Basis costs to Port /t
Sources Statistics Canada and Sask. Ag Food
Average Farm Prices Monitoring the Canadian Grain
Handling and Transportation System Annual Report
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Slow growth of W. Canadas traditional food and
feed markets
Relative World Growth in Ag. Demand Sectors
(1964100)
Relative World Demand Growth of Cereal Sectors
(1964100)
Sources USDA PSD View FSI Stands for Food,
Seed and Industrial
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Revenue Contribution from cereals is declining
leading to farm consolidation
Cash Receipts by major crop trends
Averages by Revenue Class for All Farms in
Western Canada
Sources Statistics Canada Statistics Canada
Farm Financial Survey
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Other factors impacting Cereal Competitiveness

• Restrictive regulation
• KVD (kernel visual distinguishability) -wheat,
• Trait definition all crops
• CWB Export focused
• Lack of leadership / consensus versus other crop
  sectors (canola, Pulses)
• Core technology development capacity
• Lack of significant private sector investment

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Competitiveness summary

• Competitive issues are related to
• Slow market growth
• Sector profitability / costs
• Restrictive regulations.
• There is a clear need for leadership and
  evaluation of the current strategy

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Forward looking trends Impacting Cereal
Competitiveness

• Negatives
• Crop technology advancement and convergence
• Volume expansion from non-traditional competitors
• Positives
• Opportunities with shifting population
  demographics and changing consumption patterns
• Expansion of demand biofuels (huge impact)

New opportunities are emerging, but the export
marketplace will be very competitive
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Significant infrastructure strengths
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Global trends
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Global geographic trends
W Canadian opportunities are where we can
differentiate (via functionality) and where we
have a comparative production and marketing cost
position
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Functionality (differentiation) trends
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Bio-fuels in the US

• 2005
• Fossil Transportation Fuel Consumption
• (Gallons)
• Gasoline 140,000,000,000
• Diesel 40,000,000,000

Current petroleum imports 12 million barrels /
day At 60 / barrel, annual oil import bill
263 Billion

• US Energy Policy Act (2005) RFS of 7.5
  billion gallons by 2012
• April 2007 RFS increased to 35 Billion Gallons
  by 2022 20 of imported oil (15 Billion gallon
  minimum from corn)
• US historical corn support payments gt 1.00 /
  bushel
• Compare
• 1 / bus on 10 billion bushels 10 billion
• 0.51 / gallon on 5.3 billion gallons (2006)
  2.7 billion

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Cereal Price Index Vs Inflation and Energy
Source Statistics Canada and Sask. Ag Food
Average Farm Prices and Oil Prices are converted
to C dollars from http//inflationdata.com/Infla
tion/Inflation_Rate/Historical_Oil_Prices_Table.as
p
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Farm Bill Impact of US biofuels
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Per Capita Corn Total Disappearance (kg/person)
Flattening of Curve is Technology Driven
- Yields, Starch Profile, Conversion
Source FAPRI 2007 Outlook
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US Corn Use (millions of bushels)
Source FAPRI 2007 Outlook
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US Petroleum Supply - M barrels per day
Source US Department of Energy 2007 Annual
Energy Outlook
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Bio-fuels in W. Canada

• Fossil Transportation Fuel Consumption (litres)
• Gasoline 14.7 Billion
• Diesel 13.4 Billion

W Canada 8 MT feedstock available (50 ) 2.9 B
litres 3.6 MT feed (DDGS)
Alberta target _at_ 5 blend 300 M litres 370 k
MT feed (DDGS) . 8 MMT grain utilized
Alberta potential 3.7 MT feedstock available
1.3 B litres 1.6 MT feed (DDGS)
Assumes no exports
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W Canada Ethanol (B of litres)...
Consumption in Mb., Sask., Alta, and B.C.
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Market trends summary
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Moving forward to address cereal competitiveness

• Strategically
• Differentiation (value)
• Functionality to Markets
• Traits (best in class)
• Demand optimization (growth and value)
• Domestically
• Internationally
• Crop productivity and reduced (unit) production
  costs (growth efficiency)
• Yields
• Yield stability
• Traits (abiotic biotic)

Feed
Food
Industrial
Enhancing the vision and strategy is needed, but
most importantly improved execution is critical
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Market Strategy focus
D Domestic E Export
Source Authors View
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Three strategy options
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The question ... Is it doable?

• Short answer is yes
• Strength of germplasm
• Existing industry knowledge and capacity
• Overall industry strengths
• There are gaps that need addressed
• Regulatory environment
• Strategy alignment
• Capacity
• Execution

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Germplasm and cultivar diversity
2006 estimates of cereal cultivar acreages
Source Industry communications
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Western Canadian Wheat Production of acres by
class
Average of 04/05 and 05/06 crop years
Source Industry communications
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Cultivars recommended for registration
Source PRRCG
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A role for governments.
Investment Climate
Crop Platforms / Market Segments
Core Capacity
Investment Attraction

• Entrepreneurship
• Human resource
• attraction
• Strategic market
• business
• development
• focus

Core Technology Development
Public and Private
Public
Public
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Industry Framework Concept
Source Author illustration
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Moving forward...

• Revitalizing cereal competitiveness is strategic
  (high Priority) to revitalizing the rural
  economy.
• Step 1 - Gaining a level of consensus to a more
  refined strategic direction.
• Step 2 - Investment and collaboration on
  strategic capabilities, crop platform / market
  priorities, other enabling technologies and
  regulatory and policy enablers.

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Path forward (big picture) ...

• Short term
• Step 1 - Gaining a level of consensus to a more
  refined strategic direction
• Step 2 Gaining support for an industry
  framework
• Step 3 Address the regulatory barriers
• Step 4 Initiate policy support (Provincial /
  Federal) to drive the strategy
• Medium term
• Step 5 Execution - Investment and collaboration
  on strategic capabilities, crop platform /
  market priorities, other enabling technologies

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Path forward...

• Feedstocks for the biofuels industry
• Step 1 - Gaining a level of consensus to a more
  refined strategic direction
• Step 2 Gaining support for an industry
  framework
• Step 3 Address the regulatory barriers
• Step 4 Initiate policy support to drive the
  strategy
• Lower cost energy for the feed industry
• Step 5 Execution - Investment and collaboration
  on strategic capabilities, crop platform /
  market priorities, other enabling technologies

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Summary

• Cereals are the foundation of the W. Canadian
  crop economy and support extensive value added
  industries.
• Current competitive issues are related to market
  growth, sector profitability / costs and
  regulations.
• Powerful trends are in play and there is the
  opportunity to reposition the industry gaining
  leadership and differentiated market positions.
• Leadership, consensus building and investment are
  needed and I believe Alberta can and should play
  a lead role.

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Thank You
C N Partners Inc.