Grain farmers across Canada are facing a stagflation-like, worst-of-both-worlds scenario heading into the fall of 2014 thanks to a badly timed combination of projected lower yields and weak prices.
When Canadians were hit by stagflation in the late 1970s, they got both barrels with stagnant economic growth and high inflation rates. This crop year, farmers are the ones forced to duck a two-pronged onslaught, which is coming from weather-related domestic production losses and large world supplies.
“After last year’s high prices and massive crop, we’re going to definitely see production down,” says Brian Wittal, a 30-year grain veteran and a market adviser with his company Pro Com Marketing in Alberta.
Significant Prairie area was lost this year — as much as four million acres, according to the CWB — either because it went unplanted through spring or was washed out by July flooding in southeast Saskatchewan and southwest Manitoba.
But abundant production elsewhere in the world is keeping grain and oilseed prices under pressure.
The USDA is predicting record U.S. corn and soy- bean production in 2014, with corn at 14 billion bushels and soybeans at 3.8 billion. It also expects a record world wheat crop of 716.1 million tons, with large foreign increases in Russia of six million tons, China, two million, and Ukraine, one million. With world wheat supplies rising faster than use, USDA pegs global ending stocks at a three-year high of nearly 193 million tons.
The Russia-Ukraine turmoil was initially bullish for markets, but expectations for a good harvest in those countries and the fact a lot of wheat is still available there heading into North American harvests bodes negatively for prices.
“Traditionally that part of the world by now has shipped itself out of wheat because they’re usually aggressive early in the fall, (but) a lot of wheat is still sitting in Ukraine and Russia because of the disruption,” says Wittal. “Buyers know all too well that there’s still wheat out there and that if they need to access it, they can.”
With the North American harvest right around the corner, buyers are going to wait and see what’s produced in terms of quality and volume before even think- ing about buying more aggressively, Wittal says. “Prices are going to trend flat to lower until we see some issues either with our harvest and quality, but there’s still going to be volume. There’s last year’s massive volume and you put this crop on top of it, world stocks are not getting tight or any tighter than they were before.”
Canola may have some profit potential, depending on crusher and exporter demand, and whether another transportation log-jam can be avoided this winter.
“The fact that we’ve got a large crush capacity, that’s always a supportive element,” says Chris Ferris, senior grains analyst with Canada Informa Economics, who adds export rumours suggest good foreign demand for canola seed as well. “The railroads have been moving grain fairly steadily the last little while, so the movement to export market should be broadly supportive for (canola) and the grain complex.”
A return to more normal rail service would be a boon for Wittal’s Alberta clients, among others: “If we can stay away from another logistics problem this winter, then the potential for prices to climb back up into the $10- to $11-a-bushel range is there. And at $10 to $11 a bushel when I pencil it out with any of my producers, they’re making money,” he says.
But Ferris emphasizes soybeans are overwhelming other potentially bullish factors, and if average canola yields end up reasonably good and other areas of the Prairies make up for the lost flooded acres, that’ll put further pressure on canola prices.
For Prairie farmers, lentils may offer the best hope, with values supported by flood-related production issues and strong demand.
“Since springtime, we’ve seen prices in the market go down from early forecasts, so you’ve got quite a few of the crops that have come down. The only ones that seem to be having a better gross margin look to be the lentils,” says Ferris.
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Huge expected corn, soybean and wheat crops outside of Canada have also proven bearish to Ontario farmers.
Whereas Ontario grain producers might have thought they could generate healthy gross revenues earlier this spring, the reality has now shifted significantly to the downside.
Farmers are giving up serious revenue from where the highs were set in early May on corn, soybeans and wheat, says Don Kabbes, market development manager for Great Lakes Grain.
The Ukraine/Russia situation inflated wheat prices in the spring, and corn went along for the ride. Now with the news being old in the market, the focus is on supplies, and they are ample.
“Whether it’s North America or the Black Sea, wherever you’re going to go in the world to buy your wheat, you can buy wheat somewhere,” says Kabbes.
Corn’s potential is limited as well. Not so long ago, prices were driven by ethanol demand, but from a mandate point of view, ethanol has hit the blend wall. Then in 2012, the U.S. drought lifted values. But now, record production is forecast.
“It all feels pretty heavy on commodity prices, and there’s not much driving the demand side of things because you’ve got pretty big crops elsewhere in the world — no production problems anywhere that we’re seeing. So that doesn’t paint a bullish story at all,” says Kabbes. “We really do need a production problem somewhere in the world, and we’re just not having that today — at least, we’re not perceiving that we’re having it.”
Adding to the bearish tone are sputtering economies worldwide, which also dampen demand prospects, Kabbes says. “You don’t have a robust economy that’s driving demand.”
Among the only factors that could boost prices are a smaller corn crop in the province and the possibility quality could be down. Ontario’s corn acres fell 15 per cent to 1.9 million acres, Statistics Canada reported last month, and a cool summer has slowed the crop’s development.
“And the crop is late to begin with, so the possibility of low test weight corn is very real,” says Philip Shaw, a market analyst and farmer near Dresden who grows 865 acres of corn, soybeans and wheat.
“The thing that’s helping the Ontario farmer today in corn is Ontario only planted less than two million acres of corn and we now have to import corn out of the U.S. to fill all our plants,” agrees Kabbes. “So that has increased value to the farmer today and that’s… maybe masked the severe Chicago price drop.”
Negative for both corn and soybeans could be the U.S. industry competing with other commodities like oil, coal and minerals for locomotives to move the crops to export position.
“The U.S. produces a record corn crop and a record soybean crop and has to export 15 to 25 per cent of that product out of the U.S.,” says Kabbes. “We’re going to see some depressed values from a basis perspective in the interior of the U.S… if we can’t get rail cars to move it and barges are tied up.”
A weaker loonie, though, could provide some support for eastern growers.
“If the loonie ever decides to go down to 88 cents or 85 cents, that’ll lessen the pain, whether that’s in Ontario or Quebec,” says Shaw, who points out the Canadian dollar was the bullish story last year. “It’s what really helped in 2013. Otherwise, if you had a par dollar, where would prices be? They’d be below futures prices and how would you like that?”
Stronger price opportunities in Ontario also come from larger premiums for non-GMO soybeans, Shaw notes.
But the big picture remains the province’s harvest prospects. “The weather’s not done with us yet, and a frost at the wrong time just wipes out this whole analysis,” Shaw says. “Any type of September frost will really change the game.”