For the first instalment in our five-part series this fall and winter, we sat down with Calgary-based grain market adviser and regular Country Guide contributor Errol Anderson for his insights into what to look for in markets this year.
The billion-dollar question, Anderson says, is what will happen in China. Other issues are important too, such as Greece and the chance that the U.S. Federal Reserve could jump the gun on touted rate hikes, just as the economy shows signs of flagging.
And Canada? We’re likely already in recession but just haven’t recognized the fact yet.
It all adds up to a challenging — but not impossible — environment to market grain. Opportunities will emerge, but they’ll be fleeting, so having a marketing plan and sticking to it is going to be more important than ever.
COUNTRY GUIDE: What are the main economic indicators you’re watching these days? What’s your overall take on commodity markets?
Errol Anderson: We’re definitely entering a new marketing era for commodities. For a long time the emerging economies like the BRIC countries — Brazil, Russia, India and China — have been growing very rapidly. Now we’re seeing these same countries encountering a significant slowdown with their economies turning recessionary. This has had a direct impact slowing global commodity trade. The most recent concern has been China. China’s stock market has been under considerable pressure and there are signs indicating their real estate bubble may be popping. If they’re not growing by six per cent or more, they’re really in recession. I know that sounds crazy, but the truth is their amazing growth has been so highly leveraged, they need that kind of growth to maintain the health of their credit markets.
What we’re seeing now is the early stages of their credit bubble imploding. It’s going to have a real impact on commodities, and it’s going to be painful and take awhile. What’s staggering is that China’s economy now represents 39 per cent of the total global GDP growth. China is an economic giant, and its slowdown will impact markets globally.
I think Europe and Greece are really just a side-show compared to China. It just boils down to the relative size of their economies. We pay a lot of attention to Greece because it’s right in Europe, and there could be some knock-on effects for other indebted countries like Italy, Spain and Portugal. But the loss of wealth in China due to the falling stock market is really going to affect consumption in China as well as global commodity trade. We can already see it weighing heavily on commodities like copper and iron ore. You can see it in shipping rates, with the Baltic dry index basically collapsed. Container ships are simply being dry docked.
CG: You paint a concerning picture. Until recently we’ve seen fairly rosy economic data, especially out of the U.S.
EA: I don’t think the picture of the U.S. recovery has ever been as good as a lot of people thought it was. The U.S. has experienced a modest recovery since the 2008 financial crisis. But these gains are fragile and can come under pressure, especially with economic uncertainty around the globe causing the U.S. dollar to rise. That of course makes it much more difficult for American manufacturers and exporters to compete globally, which undermines their recovery. I think this likely means that, despite public posturing, in reality we’re in a low interest rate environment for several years. An interest rate increase while economic recovery remains fragile is highly risky, and a gamble for the U.S. Federal Reserve.
True, we’ve already heard a lot of talk about U.S. interest rate increases, including some pretty strong language from Fed governors, but I think what they’re really doing is talking the talk, but not walking the walk. If the Fed does hike rates, it will be just a toe in the water to measure the potential market contagion that might occur both outside and within U.S. borders.
At the same time, we’ve seen both the IMF (International Monetary Fund) and the World Bank request that the Fed leave interest rates untouched. They’re concerned about what the global impact of that move would be, since the U.S. dollar is the de facto global currency. Take Brazil as just one example of what might happen — they owe a lot of money and it’s all in U.S. dollars. If U.S. interest rates rise, so will theirs, putting a lot of pressure on their economy just when they don’t need it, because commodity demand is falling. Also remember, by the time President Obama is out of office, the U.S. debt will have ballooned towards a staggering $20 trillion. The U.S. also has to service this debt with higher interest service charges.
It all adds up to a lot of talk, but no sudden moves. If they do move prematurely, it could seriously undermine the U.S. economy and slam the brakes back on. Global contagion could occur. In a lot of ways the U.S. is stuck in the same stagflation trap of chronic slow growth that Japan has found itself in for many years now.
As for Canada, I personally think we’re already in recession, government data just hasn’t caught up to it yet. If China sneezes, Canada catches cold. We can see this in recent moves by the Bank of Canada to reduce interest rates even further. Clearly it’s concerned with the fragility of the Canadian economy.
CG: That sounds grim. Can I safely put you on the bearish side?
EA: (Chuckles.) Sometimes I think I really need to stop being so cautious towards prices. But I’m not trying to sugar-coat commodity markets. This is the reality. Once the process of credit deleveraging occurs, commodities will again turn bullish. Commodity prices — from crude oil to precious metals to copper to grains — are going to remain capped. But there will be opportunities for pricing profits, if you’re watching for them and you’re ready to move when they occur. However, reducing your production costs and paying down debt will also be a big part of this business formula.
This is definitely going to be a year when having a marketing plan in place and doing your best to be disciplined and sticking to it will help business success. I think probably the greatest danger is going to be for producers who fall victim to picking tops — markets will rally, but rather than sell at a profit, they’ll hang on, expecting prices to recover fully towards previous years’ highs. I really don’t think, given the overall global economic picture and what that’s doing to demand, that it is in the cards for the foreseeable future.
Market recoveries are going to be fleeting and what we’re really going to see is prices see-sawing up and down. Rallies will be short lived, and sell-offs can be swift. You have to be prepared for this. If you don’t understand the nature of this beast, pricing opportunities will be lost.
CG: You say planning will be very important. What would that look like?
EA: The two leading indicators for a farmer putting together a marketing plan are how much control they feel they have over their business, and how well they’re able to sleep at night. Those are the indicators that are really important, and it all starts with the farm balance sheet. It’s not rocket science, but it does require that you get a firm handle on the financial side of your business and understand what your obligations are and when they come due. You also need to have a really good handle on what you have for sale, how much in inventory, how much it cost to produce and what a profitable price will be.
Many farmers do a really good job of this stuff already, but I do think there are some farmers who could up their game a bit. Strong record-keeping is essential, as well as noting why key decisions are made. Try to document why you made a particular sale. Over time, as you collect more and more data and history, a pattern will appear. It’s going to reveal how you make sales and the reasoning behind cash sales. It might even help reveal patterns and market situations where you find yourself doing less-than-strategic marketing, like panic selling to meet a debt obligation or selling into a falling market.
Collecting this sort of information is really important and a valuable tool, especially over time.
As for the day to day, I can’t overstate this — don’t fall victim to pure speculation under the guise of marketing. Your goal as a grain marketer is to find opportunities to price profitably. Don’t hold on, hoping to hit the market peak. The reality is we’ve all tried, and almost none of us have succeeded. You don’t see a market peak with any certainty unless it’s in the rear-view mirror.
Generally I recommend that growers use a mix of both cash contracts and the added horsepower of the tools you can find in a commodity trading account.
I’m also generally not a big fan of the extensive use of on-farm storage. Storage can be overused and abused as a marketing strategy. One of the fallacies, as I see it, is producers looking at stored grain as purely an asset, when in reality, I think it can also be seen as a bit of a liability. There are certainly risks tied to storage. Many farmers would be, when appropriate, better served by selling the physical grain and getting early cash flow to pay bills, then turning around and buying the paper in the form of call options, to capture future market upside. I recognize this might not be a big issue for some of your readers but it’s a strategy that bears consideration.
CG: Any last strategic points?
EA: If you believe the world owes you your cost of production, you are mistaken. It’s demand that’s driving this market, not supply.
Markets can and will remain below the cost of production for long periods of time. You’ve heard me say this before, but it deserves repeating — bear markets, on average, last more than twice as long as bull markets.
This is why it’s so very important to take emotion out of your business decisions. It’s why tracking the true cost of production, reining in expenses, understanding all the tools available in your marketing tool box and setting up and executing a marketing plan are so important. Over the next few years, these concepts will all be put to the test.