Additional shifts are also likely in subsequent reports, as dry conditions in southern Alberta and Saskatchewan may alter some intentions.

Statistics Canada forecast canola area for 2019 at 21.3 million acres, which would be down by 1.5 million acres from the previous year and the five-year average of 21.7 million.

“A good portion of the acreage cut is associated with drier conditions in the southern Prairies, that are not the prime canola areas,” said Mike Jubinville of MarketsFarm Pro.

Trade troubles with China also added to farmer sentiment of adjusting rotations away from canola in those dry areas and could lead to more acreage trimming, he said.

Much of the area lost to canola will be seeded to wheat, according to the Statistics Canada data, with total wheat acres forecast at 25.7 million, up from 24.7 million seeded in 2018. Of that total, durum area is forecast to decline by one million acres, hitting five million.

However, area seeded to other spring wheat, which includes Canada hard red spring (CWRS) wheat, is expected to increase by about two million acres at 19.4 million.

“Yield and quality of this year’s crop will count more than the acreage put in,” said Jubinville.

Barley area was forecast at 7.2 million acres, coming in well above the 6.5 million acres seeded in 2018 and the previous five-year average of 6.3 million.

Errol Anderson of ProMarket Communications in Calgary said the 10 per cent increase in barley area was at the higher end of trade estimates, and would be bearish for prices.

— Phil Franz-Warkentin writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

Table: A recap of Statistics Canada’s acreage report as of March 31, 2019, in millions of acres. Pre-report expectations provided for comparison purposes.

* – Total wheat includes spring wheat, durum wheat, and winter wheat remaining after winterkill

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To Errol Anderson of ProMarket Communications in Calgary, canola’s path is connected to a trade deal between the U.S. and China, which be a boon to U.S. soybeans — with a spillover into canola.

“In all honesty, the markets are waiting for the U.S./China trade deal and it’s not coming. The probability of a deal is very low,” he said.

The projected deadline for a deal has been pushed back a number of times, and is currently expected to be completed by the end April or the beginning of May.

“It’s more than trade, it’s technology. It’s a technology power battle,” Anderson said of the negotiations.

Over the course of months of negotiations, technology has one of the issues yet to be resolved, along with intellectual property rights and China’s industrial subsidies.

If there is a deal, Anderson predicted U.S. soybeans would rise by 50 U.S. cents per bushel. For canola that would mean a C$10-$15 per tonne boost in prices. If there isn’t a deal, he projected canola to fall by those amounts.

“Canola respects the direction of soybeans,” he said.

Should traders become frustrated, the May contract for soybeans will fall below US$9 per bushel, he said. Otherwise soybeans will continue to bounce around by 50 cents either way.

One issue standing in the way of canola benefitting from a U.S./China trade deal is the dispute between Canada and China, as the latter has banned canola imports from Canada.

China claimed that shipments by Richardson International and Viterra contained hazardous pests, but no evidence has yet been presented. Canadian farmers were on Parliament Hill in Ottawa this week demanding the federal government pursue a harder line against China.

For its part, the government previously stated it would not retaliate against China and will try to resolve the matter on a scientific basis.

Canada’s federal agriculture department said via email Wednesday that Agriculture Minister Marie-Claude Bibeau wrote to her Chinese counterpart on March 31, offering to send a high-level technical delegation to China.

Officials at Canada’s embassy in Beijing are “currently in communication” with Chinese customs officials to discuss details, the department said, adding the federal government is “urging China to receive our delegation as soon as possible.”

— Glen Hallick writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market reporting. Includes files from Glacier FarmMedia Network staff.

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While the market has stabilized for the time being, it’s technically oversold, Anderson said.

The market can rebound $5-$10 per tonne, he said, but it’s also very much in need of fresh demand news to sustain it.

“Without it, it’s just a bounce in a bear market.”

As trade talks between the U.S. and China have bogged down, Anderson is concerned a deal may not be reached any time soon or not at all.

With a lack of any positive news from the talks, the markets have become very wary. To jump-start negotiations, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin will travel to China next week. Afterward, Chinese Vice-Premier Liu He will come to the U.S. for further negotiations.

The current state of trade talks has had its effect on the soybeans at the Chicago Board of Trade. Anderson said soybeans have been slipping and are in danger of falling further, perhaps to US$8.75 per bushel for the May contract.

“That will place a drag on us,” he said of canola prices.

To help protect participants, he said buying put options, such as $490-$500 per tonne for November canola, can guard against sharp losses.

“It’s worthy to put in your back pocket, if we get a normal crop and battling this trade deal six months from now. These puts will be excellent protection,” Anderson said, noting that’s based on an assumption for normal weather in 2019.

— Glen Hallick writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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The general trend is likely pointed lower in the near future, with any developments in trade talks between the U.S. and China likely to provide some direction.

“The market is awaiting a potential agreement before March 1,” said Errol Anderson of ProMarket Communications in Calgary. The U.S. is set to impose increased tariffs on Chinese goods if a deal between the two countries isn’t reached by then.

While negotiations are underway, burdensome supplies of both soybeans and canola will likely continue to weigh on oilseed prices.

“You can’t keep markets up on hearsay, and we’re still in the hearsay stage,” Anderson said of the trade talks.

“We’re going down, there’s no nice way of saying it,” he said, adding “the U.S. will have an enormous carryout and I can see the beans having an ‘eight’ in front of them on the futures… It’s just a grind.”

The front-month March soybean contract settled Wednesday at US$9.165 per bushel.

Canola supplies are also large, and with the March canola contract testing the $480 per tonne level, Anderson placed the next support at $475. After that, the weekly charts point to a downside target of $465 per tonne, he said.

Demand will be needed to get out of the rut, but Anderson wasn’t certain if there would be enough.

However, while futures may be trending lower, “the strength will be in the basis levels,” he said.

He expected farmers would hold onto their crops and be unwilling sellers, which means grain companies will need to offer better prices on the cash side.

— Phil Franz-Warkentin writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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Chart structures have proven that crude prices have pushed and pulled canola up and down in recent years. However, since the start of 2018, the gains enjoyed by crude oil have failed to lift canola.

On Jan. 10, the cost of a barrel of oil on the New York Mercantile Exchange was US$61.82. Now, that same barrel is closer to US$71.

Canola, on the other hand, has fallen from the $505 per tonne mark down to the $485 per tonne mark, as of Friday’s close.

According to Mike Jubinville of ProFarmer Canada, the link that existed between the two has been disrupted by the global trade disruptions emanating from the White House, and to a lesser extent China.

The relationship between the two commodities should eventually return, he said.

“We’ll swing back to traditional relationships between commodities but there are periods of time of disconnect and right now is one of them,” he said.

Another market-watcher agreed crude’s influence on canola seems to have waned.

“I don’t really look at crude as a canola indicator very much anymore,” said Errol Anderson of ProMarket Communications. He added crude oil has turned into a manipulated market from global players and tends to be focused on issues stemming from the Middle East.

To understand the influence crude oil initially had on canola, one first has to look at energy.

Canola, like many other vegetable oils, has a stake in the biodiesel market; when crude oil is moving one way or the other, biodiesel will get caught up in its wake. That bias eventually transfers down to markets such as European rapeseed futures, Malaysian palm oil and eventually canola.

Crude is also considered a leader in the market as it is the highest-traded commodity by volume and by valuation.

Also, when crude oil is on the move, it always attracts the interest of the speculative community.

“If crude is making a move higher and you have a lot of spec money that wants to enter commodities, and they spread it around, you get some residual effect on the ag sector,” Jubinville said.

Commercials will also get more interested in buying up commodities such as canola if crude makes a jump higher, he said.

For now, the escalating trade battle between the U.S. and China and unpredictability of U.S. President Donald Trump continues to cancel out most other influences.

“The microcosms of Trump‘s tweets are the short-term influence that we are under now,” said Jubinville.

— Dave Sims writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting. Follow CNS Canada at @CNSCanada on Twitter.

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Statistics Canada will release its Principal Field Crop Areas report on Friday (April 27). Last year saw Canada’s canola area at a record 23 million acres, but this year could again set a record. Average trade estimates peg canola at 23.7 million to 24.3 million acres.

“The economic trend of canola is still strong enough both for old and new crop to suggest profitable pricing opportunities in the year ahead. (This) is going to lead to canola acres going up,” said Mike Jubinville of ProFarmer Canada in Winnipeg.

Last summer saw large areas of Western Canada suffer from drought. According to Jubinville, farmers usually shy away from canola during dry stretches, but with snowfalls in March and April, soil is starting to be replenished.

“Canola doesn’t respond well to (drought) but if we get some kind of reasonable start, precipitation- and soil moisture-wise, in those troubled areas we may pick up more acres there than we thought.”

While acreage is set to grow for canola, pulse acres are predicted to drop. With exports to India non-existent due to import tariffs, farmers are expected to switch to crops with more promising market opportunities.

Average trade estimates have pea acres at 3.2 million to 3.7 million acres, compared to 4.1 million acres last year, while lentil estimates are at three million to 3.9 million, compared to 4.4 million last year.

“The market is discouraged. And then last year there were some farmers that were discouraged with lentils because of the poor yields in the main lentil-growing area,” said Jerry Klassen, manager of Canadian operations with Swiss-based GAP SA Grains and Products in Winnipeg.

Errol Anderson of ProMarket Communications in Calgary is feeling more optimistic about the pulse crop outlook than his counterparts. He thinks that “somewhere, somewhere, somewhere,” India is going to have to back off and then pulse prices will spring back up again. He is recommending farmers stick to their usual pea acreage and be prepared to store the harvested crop for a while.

While canola acres are on the rise, soybean acres could slightly fall. Last year saw a record 7.3 million Canadian acres planted, with Saskatchewan farmers testing out the crop. This year, trade estimates are pegged at 6.8 million to 7.9 million acres.

“I think further out west there was some disappointment with how their soybean experiment turned out last year,” Jubinville said. “So I think you may have some modest retrenchment in acreage expectations out west, particularly in Saskatchewan.”

Overall, industry professionals expect to see acres switch back to the traditional western Canadian crops of wheat, barley, oats and canola, while special-crop acres, such as in lentils and peas, fall.

“The price structure is really favouring the canola,” Klassen said. “I think also the barley market is quite strong, it has low input costs. And then also durum spring wheat, I think that farmers realize they can get very good yields.”

— Ashley Robinson writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting. Follow her at @AshleyMR1993 on Twitter.

Table: Pre-report trade guesses, in millions of acres.

* – Includes winter wheat remaining

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Figures for barley, lentils and peas were above year-ago levels, but movements in those markets are more likely be driven by demand factors.

Canola

Stocks of canola, as of March 31, were at about 6.6 million tonnes, according to the latest data from Statistics Canada. That number puts canola stocks at a four-year-low.

It also confirms market speculation that old-crop stocks are tight, said Mike Jubinville of ProFarmer Canada.

Despite some clarification, he added, there is plenty of uncertainty about old-crop stocks.

“The trade is still of the opinion that StatsCan is using too low of a production number for last year.”

Last year’s production has the potential to be bigger than the 18.4 million tonnes previously reported by StatsCan, he added.

Traders are uncertain about how much canola is still in fields — and the condition of those crops — though the stocks number shed light on the situation.

“It [the report] continues this idea that there is potentially a tight stocks scenario going into the end of the marketing year,” Jubinville said.

“But we’re really not entirely sure yet, because there’s these unknown variables of last year’s production. What’s the real number?”

Though Jubinville added that the figure is supportive, traders may have already baked it into the market. ICE Futures Canada canola is moving near “the granddaddy of overhead resistance,” a range of $530-$540 a tonne.

“It may be slightly bullish toward canola,” said Errol Anderson of ProMarket Communications.

“But this is one report that’s quickly forgotten, just because of the time of year,” he added.

Traders are watching the weather, and demand from key buyers, notably China, he noted.

Demand from China could taper off, as the country deciphers its credit situation.

Grains

Statistics Canada on Friday reported barley stocks at 4.6 million tonnes, all wheat at 16.6 million and durum at 4.1 million. All of those figures are above year-ago levels.

Last year, wetness resulted in a large amount of feed-grade and low-quality grain, which may be one reason why figures are ahead of year-ago levels.

Limited export demand for barley is one reason for the boost in stocks, Anderson said.

“It has to focus on the domestic feed market, and of course there’s not enough demand. So that’s why those numbers are maybe a little on the high end,” he said.

Canada’s feed situation could improve moving forward, he added, “and I’m actually a low-grade bull on barley.”

While the barley number wasn’t supportive, Jubinville said, it likely won’t affect values.

“It’s just not enough out of the range of expectations to really change anything, and we’re still dealing with a fairly large feed supply,” he said.

But for durum, while supplies were well-above last year, market watchers had expected “monster” durum stocks, and a figure of 4.1 million tonnes seems tame.

“Maybe we’re using up this durum faster than we thought,” Jubinville said, as lower prices drive up demand.

The all-wheat number was also lower than expected, though part of that may be comprised of lower-than-expected durum stocks.

It’s surprising, Jubinville said, that Minneapolis wheat futures would rise in reaction to a Canadian report, but he thinks that may be a feature in that market.

Pulses

Statistics Canada pegged lentil stocks as of March 31 at 1.1 million tonnes, and dry peas at 1.7 million.

“I don’t think there’s anything there that really changes the story on lentils or peas enough to affect price,” Jubinville said.

Issues in markets outside of Canada matter more to prices than supply.

While pulses are not in a “bull market,” he added, values have improved with an extension of a fumigation policy from India.

“The supply/demand balance looks well-supplied; you could term it burdensome,” Jubinville said.

“But in and of itself I don’t think the numbers quoted today will put any new pressure the market that wasn’t already there.”

— Jade Markus writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow her at @jade_markus on Twitter.

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Right now the world has plenty of potash, copper, oil, gold and grain. Producers of all types have responded to the extremely strong price signals they’ve been receiving lately and have grown their productivity.

That’s meant new energy projects producing technology via fracking and renewables, new mines coughing up more metals and minerals, and new plants churning out chemicals.

In the global grain market, it’s meant productivity investments, especially in longtime basket cases like the Black Sea area of the former Soviet Union, plus new acres primarily in underutilized areas such as parts of Brazil.

Those investments have met the explosion in grain demand, which came primarily from two sources, biofuel mandates and the growing demand from rapidly modernizing countries like China. Now that this demand growth appears to be waning, however, we’re back in an oversupply situation in most global grains, and that’s weighing on prices.

Canadian producers have been somewhat shielded from this effect as the Canadian dollar has fallen along with commodity prices — but even so, it’s back to scratching for break-even for these growers, says grain market analyst Errol Anderson from his office in Calgary.

“We’re enduring the depths of this commodity crisis right now, there’s no doubt about it,” Anderson told Country Guide during a recent conversation. “It’s a recession in global commodities, and the question is, what will it take to jar them out of it?”

For at least the next two to three years, Anderson doesn’t see catalyst in growing demand. All signs point to a slowing global economy, with the key item to watch being the ocean-going container freight index. That’s a global transportation index reflecting the cost of shipping across the seas, and while it might seem a bit arcane, it’s definitely a leading indicator to watch for economic recovery or evidence of a slowdown, Anderson says.

“Containerized ocean freight rates are basically a signal on the health of the global economy,” Anderson says. “It represents the true demand of goods around the world. As an example, the Shanghai containerized freight index reflecting ocean freight between China and Europe is now 45 per cent below levels seen even during the 2009 financial crisis”

That’s not great news for anyone selling grain, or any commodity for that matter. It suggests a slowdown in global demand especially from emerging and commodity-based economies. Until this demand for raw commodities improves, excess productive capacity in economies like China will remain under-utilized. It will take a while, maybe years for this demand to improve.

Farmers might be tempted to just throw their hands in the air and accept it’s back to the bad old days — but Anderson insists that now, more than ever, farmers need to look at things just a bit differently. Every crisis is also an opportunity, the old wags say, and opportunity just might be knocking again — but it takes the right attitude and marketing skills to find business profitability in an otherwise bearish marketplace.

“When times get tough, farmers tend to complain they’re just price-takers, and they have no control over what they’re paid. To an extent that’s true — but to an extent it’s also true of every other business out there,” Anderson says. “A down economy impacts every business regardless of industry. Successful businesses are the ones that come up with a strategy to lock on profits. And a farmer who wants to thrive under these more challenging market conditions needs a plan.”

Country Guide: With all that’s going on these days, how do you know your marketing plan is solid?

Errol Anderson: In a lot of ways, that’s going to come down to how a farmer is feeling about their marketing plan as the year rolls on.

If you find yourself constantly complaining about cash prices, that’s a pretty good sign that what you’re doing isn’t working.

In a way, the world is a big swimming pool and a marketing plan is learning how to swim in it. Once you’ve learned to swim, you just get on with the business of swimming, rather than complain the water is too deep or too cold. Complaining about prices is a sign of marketing weakness, not strength.

That’s not to say there won’t be challenges. Life hands us all challenges, farmers and non-farmers alike. What doesn’t work for any of us, however, is an ongoing sense of victimhood. If what you’re doing isn’t working, be prepared to change it, because as they say, doing the same thing over and over again expecting a different result can be the definition of business madness.

Building a plan isn’t an easy thing. It also isn’t a one-size-fits-all project. This is really building a custom car that you feel comfortable in operating. No two custom cars are alike, but each is the perfect car for its owner because it’s built exactly to his or her specifications.

Once you’re done building your plan, it should make you feel comfortable that it meets the needs of your farm business. And once that plan is in place, revisit it regularly. Make sure the goals for this year still make sense. Regular business meetings with everyone who has a financial interest are a perfect time to review and fine tune your marketing plans. It is an evolving process.

CG: In your experience, which marketing tools work best for growers?

EA: The key is flexibility and diversification. There are a lot of pricing tools out there that offer control and market flexibility. Tied to a marketing plan, these tools can zero in and produce a steady flow of profitable pricing. This avoids that sinking feeling that growers are simply price-takers. Growers can take control of their own pricing destiny.

For instance, growers who need cash flow or who need bin space have alternatives to lessen their price risk, meaning they can take advantage of a price rise after the grain has left the bin. They may have to sell grain today, but there are tools available to take advantage of a price rise later in the crop year should it occur.

But there are also tools to lock futures or basis levels that may or may not commit to delivery. Sometimes you will want to commit to delivery to ensure physical grain movement. Sometimes it is best not to commit to delivery due to production uncertainty. I feel strongly that a solid marketing plan is a blend between cash contracts and a commodity trading account. They both have their advantages and disadvantages at times.

So you need to understand the cash market tools at your disposal from local buyers and how a commodity trading account can strengthen your business management. Should you find a broker you’re comfortable with, set up an account so you’re ready to use it if the situation warrants it.

Some growers use a trading account depending on basis levels or to avoid making cash grain delivery commitments. If basis levels are attractive, cash contracts stand out. But if basis levels are weak, commodity accounts have a role to manage this.

Remember, options don’t commit the grower to physical delivery and there is no risk of margin calls. That can be a bonus at times. But you can’t make physical grain delivery.  Be cautious of trading futures outright. Market volatility is not for the faint of heart. Trading futures outright takes discipline to tie it to a plan.

CG: Many producers may be relatively happy about crop they have already priced, but they’re concerned about unpriced grain. Any tips?

EA: That’s nothing unusual, though yes, that feeling might be a bit stark this year. But there’s always a point in the crop year where your attention turns to how to market the crop remaining in storage. Two key factors impacting this decision are cash flow and bin space, and toward the end of the crop year the decision may be, do I sell it this year or next?

Here’s where market management and understanding strategies can be helpful for taking control. I’m of the view, that you should move the grain off the farm as quickly as possible and try to move your grain in the same crop year you produce it. Long-term farm storage sometimes pays off, but not often.

Most often, you are not paid for the risk of storing grain on farm, to say nothing of the storage issues.

Let me use a canola example. Imagine you sell your canola for $10.75 a bushel, which is a reasonable cash price. But you think there’s some potential for El Niño-related market activity and you don’t want to miss that potential upside. So you purchase a call option — let’s say the call premium costs you 25 cents a bushel — that gives you the right to buy that amount of canola at a specified strike price into the future.

If prices stay where they are or go down, the call premiums will eventually expire worthless and you’re out the 25-cent-a-bushel premium you’ve paid. But if prices go up, your call option premium increases in value. You can add these gains to the $10.75 a bushel you’ve already got in your pocket. But if canola prices drop to say $9/bu., your call option will expire worthless and you would still net $10.50/bu. on your canola ($10.75/bu. cash sale — 25-cent/bu. loss on the call).

On the cash market side, this is where you can really benefit from knowing your local market. What does a good basis look like? Have you shopped your samples around? Make sure you have a bond with your buyers. If there’s a sudden need for product, premiums may appear, and you’ll be on the list to get that call. Farmers need to be salesmen too. You really need to work your local buyers and understand what marketing tools they can provide for your operation.

CG: If we’re likely looking at a prolonged period of softer prices, is it also time to eye new-crop prices? Should grain be priced well ahead of the combine to lock in profits?

EA: I’m a fan of forward selling crop, within reason. You should be prepared to sell before you go to the field, by as much as 30 per cent of your expected production if a winter rally occurs, then up to half your expected production may be profitably priced before combines hit the field. Then you know your fall cash flow needs are covered by profitably priced grain.

Once you have completed harvest, let’s say you have about 50 per cent of your grain unpriced while you are already starting to look forward to pricing new crop. It’s like turning your marketing decisions about 180 degrees forward. With this thought, a grower may be looking to price both old- and new-crop grain on rallies. Again, knowing your production costs and bill payment schedules will lend a hand in these decisions. Farmers who are prepared and can move quickly when opportunities present themselves are often most successful.

CG:  Obviously there are going to be things happening that farmers have no influence over — what are the key global issues to watch over the next while?

EA: There’s no doubt there are a number of factors farmers just don’t have control over right now. For example, we don’t really know how the U.S. Federal Reserve policy on interest rates will play out. If it supports further gains in the U.S. dollar, that could further slow exports, including grain. This would impact U.S. prices which will also impact ours. It could trigger further price pressure, at least temporarily. A weaker Canadian dollar should at least partially offset that, but U.S. markets tend to dictate Canadian price direction.

Also, China’s economic slowdown has a direct impact on all global commodity prices. This will affect the volume of trade and prices between Canada and China in the months and years ahead. The global currency war which has been generated by central banks’ focus on money printing also has a huge impact on prices, and is also beyond our control. Brazilian farmers are now making more money growing soybeans than ever before because of the collapse of the real currency. This will continue to push South American soybean plantings. And Russia has gained global wheat market share due to the collapse of its ruble.

It has been a race to the bottom for currencies as every country wants to gain export competitive advantage.

Despite these global issues, however, there will be attractive pricing opportunities. Growers need to be responsive to them. The global commodity downturn impacts everyone, and it definitely heightens the need and value for a disciplined marketing plan that will lock in those profits.

This article first appeared as “Busted flat” in the January 2015 issue of Country Guide

The post Global grain markets and the global downturn appeared first on Country Guide.

Now there’s a question hanging over global commodity markets in the form of the Anglo-Swiss commodity giant Glencore — you know them in Canada through Viterra. Market watchers are buzzing that they’ve overextended with a poorly timed expansion strategy that’s soured as commodity prices have fallen

When a big player like Glencore and its finances come under the microscope, this system can be disrupted until trust can be re-established between buyer and seller.

It’s not going to be 2008 all over again, by any stretch, but it could mean commodity markets and their global movement slow or even seize up for a time, especially if Glencore unwinds in a less-than-orderly fashion. If that happens, everyone is going to be glancing around, wondering who has been left holding what, and if they’re still good for the paper they’re issuing in the form of LOCs.

It all adds risk to a global commodity system already under pressure. It also raises a series of interesting questions: how can you tell when something like this is for real, or if it’s just market noise? What does it mean for your marketing plan?

We asked Calgary analyst Errol Anderson for help making sense of it all.

COUNTRY GUIDE: People  are likening Glencore to Lehman Brothers. Is it really that serious?

Errol Anderson: It is definitely a big deal from a global trade point of view, and with a company as massive as Glencore, a crisis for traders could slow the recovery of commodity prices. Also seriously, it could hamper movement of all commodities including agriculture from country to country for a time. This could definitely affect us, especially in Western Canada.

CG: You’ve talked to us in the past about market noise and how to filter it out. Does that apply here?

EA: No this isn’t market noise, this is a real issue that could delay the recovery of global commodity prices. But the effect on local grain movement hopefully is going to be relatively short. It should not impact the underlying fundamentals of the market.

But make no mistake: I do hear market noise every day. I describe it as whatever the issue of the day is that’s capturing a lot of attention, but doesn’t truly affect the overall situation in a large or meaningful way.

I’ve been analyzing markets for 30 years, and when I started, my tools were a calculator, a transparent ruler and a copy of the Wall Street Journal. That’s how we analyzed supply-and-demand fundamentals and their effect on price direction. These days, commodity funds can execute thousands of trades a second based on technical chart signals, exerting a huge impact on price direction, certainly in the short term.

You can analyze a market fundamentally all you want, if these funds take the opposite technical view, it can be like getting run over by a freight train, at least in the short run. Funds have a huge say in price discovery and market volatility. So you can either grump at them or view their price power as an opportunity to add profit to farm production.

A helpful illustration might be looking at the way a weather event can affect today’s market.

Late spring, there was a lot of excitement over flooding in the U.S. Midwest. We did see corn and soybean prices move higher over a short period, mainly on commodity fund buying activity. But flooding doesn’t alter the underlying production of the market because, in reality, it doesn’t affect that many acres — when it does flood in the Midwest, it of course only floods along the rivers, not the whole region, plus it offers an excellent start for crops outside the flood zone. I call this market noise. The media is hyping the event. Fund money pours into the long side of the market. But the impact of the flood is always short lived.

However, it may turbocharge the futures market at least for a short while. The underlying fundamentals hadn’t changed. Excellent yields were on the way as a result of this heavy rainfall. As a farm manager, if past experience allows you to realize this as a short-term pricing opportunity, you may price a portion of your crop often above what the true-value market fundamentals suggest.

CG: Is that why it’s so important to separate what’s real and what’s just noise?

EA: Yes, but you also have to understand the speed at which information instantly impacts prices and triggers almost immediate market volatility. Often markets react to news before the impact can really be understood.

That’s because of the speed of trading, human emotion, and the power of commodity funds. These are speculative investors who don’t necessarily understand agriculture. What they’re trading is really immaterial to them. They could just as happily trade cardboard boxes if a futures market existed for them. So they’ll react and market prices may overreact. But from a farm manager’s perspective, this fund trading activity often provides excellent pricing and hedging windows.

The risk is that you get caught up running with the herd, but commodity markets without fund activity would be a lot less exciting with fewer pricing opportunities.

CG: You talk about the emotions of a market, but at the same time a market can be pretty unemotional, can’t it?

EA: The underlying fundamentals of a market have no emotions. But markets are made up of nothing but people and their emotions, and they can be highly emotional. These emotions affect the market for a short time, with movements well above and well below the true value of a commodity.

If you don’t get caught up in this whirlwind of emotions, market noise and the volatility, it can represent real opportunities for a farmer looking to price their crop and manage risk.

Of course, farmers can have their own emotions too. You may get caught up in the hoopla of a rally and let your guard down expecting that higher prices are here to stay. During the last U.S. drought, some growers really did think $17/bu. soybeans were just a fact of life now, and $10/bu. corn too.

However, farmers have already accepted the market has moved on. Farmers are really sharpening their pencils both in terms of their marketing plan and cost side of the balance sheet. It really is during tough times that good farm managers distinguish themselves.

They’ll be the ones who have a marketing plan and stick with it, pricing on upticks in the market that they know offer better returns and often are short lived. Now more than ever, having that plan and executing on it will be vitally important.

As a good marketer, you really need to strip the emotions out of the equation and be analytical, calm and clear headed, with ice water in your veins.

CG: Are there any reliable indicators for farm managers?

EA: When markets act like a caged animal, whether up or down, one of the most telling indicators is open interest. Open interest is the total number of contracts for a given commodity that remain open in a trading month. When you get a lot of open interest in any given contract, it acts like the gas pedal for prices.

Here are some scenarios:

Let’s say the futures are surging into record-breaking territory. No one knows where the top is. Everyone’s a buyer, there are no sellers and the open interest is climbing. This situation suggests prices can go even higher yet. More buyers continue to pour into the heated market. But suddenly open interest drops off. This may be an early warning signal that a price peak is near. Long liquidation is beginning to take place.

But let’s flip this bull market scenario to a bear market. Let’s say futures are in a dive and cash prices are plunging. If open interest is rising, this suggests more sellers are entering the market. Prices can fall further. But should open interest begin to decline, this now suggests the shorts or sellers are starting to buy back their positions. This is called short-covering and it is an indication a market bottom is near. This is not much different than pilots watching their gauges in crazy weather. Open interest is a technical gauge when price volatility becomes extreme.

CG: What about the saying that if prices seem to be too good to be true, they probably are?

EA: Unfortunately, that is most often true. There’s been some wild price experiences in commodity markets over the past few years that have generated some amazingly bullish talk — $6,000 an ounce gold for example, or $10 per bushel for corn. It’s the sort of thing that’s easy to put in print, and hey, anything is possible. But market noise is easy to produce and its shelf life can usually be measured in a few days.

CG: This is complex stuff for those not familiar with the impact of market noise and volatility. It seems experience can be a real benefit — what about farmers newer to the game? Any suggestions for them?

EA: I think younger market participants, regardless of the sector, are at a disadvantage. Nothing beats experience when it comes to markets. Take interest rates, for example — we’ve had low rates for many years now and arguably there’s an entire generation of traders that haven’t ever seen a period of even normal interest rates, much less a period of rising rates.

Younger traders and younger farmers should draw experience close to them. It can be a market adviser, but it doesn’t necessarily have to be. It might be a government or university extension person or even an older farmer in their own community who has gone through the world of pricing knocks and is willing to share that experience.

From there it’s really going to all be about understanding market fundamentals, understanding when you may be hearing market noise, and learning to take advantage of it. Having a plan and the discipline to execute it and not be distracted from it by market hoopla is advice that applies to all of us, regardless our experience.

This article was originally published as “Market noise” in the December 2015 issue of Country Guide.

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It’s no wonder that 2015 has become the year of China, with the whole world watching its financial upheavals, stock market corrections and other gyrations.

As China ratchets its growth down, the result has been lower demand and the emergence of a multi-sectoral bear market in commodities.

Global grain is no exception, says market analyst Errol Anderson. Chinese buyers might represent a smaller market share in these commodities — they’re roughly 20 per cent of global wheat demand, for example — but they’re still significant enough to knock demand down another notch within a market that is already struggling with supply.

This is a sea change after a number of years of buoyant demand from growing economies and the imposition of ethanol mandates for vehicle fuels. That was a secular bull market. This is a secular bear, working its way through the excesses of the bull. That process always takes some time, and the farmer who understands the reality of where the market cycle is will be better positioned to grab profitable pricing opportunities when they appear, which they always do.

On the other hand, Anderson warns, the farmer who hangs on expecting the bull to come roaring back may be disappointed, hanging on and hoping for better prices that never come, and in the end selling for less than if they’d had a plan and stuck to it.

Country Guide: Tell us a bit about the personality of the market right now. What do farmers need to understand in order to make a marketing plan that works?

Errol Anderson: Key trade and economic wars are beginning to develop. There’s a global vegetable oil war going on between soy and palm oil exporters battling for market share, there’s a wheat price war going on between the U.S. and Russia as they battle for market share, and likewise there’s a battle for market share among oil producers. All this is combining to produce a strong undertow for all commodities, which really means we have to keep price expectations in check.

On top of these trade skirmishes, there is also a global currency war ongoing right now. Central bankers continue their rush to print money in an effort to devalue their currencies and make their economies and exports more competitive globally. It’s actually a battle for the bottom. Who can devalue their currency the most?

Demand is everything right now, and it’s not strong. I really think that 2016 is shaping up to be a battleground year. That’s going to keep commodities of all types, including grains, under a lot of price pressure.

CG: More than once I’ve heard you say that falling markets are more predictable than rising markets — now that we’re in one, what should we expect?

EA: That’s really going to be the key thing for farmers to get their heads around right now.

The plain truth is that bear markets always last longer than bulls. Bull markets charge ahead, but you can’t really predict where the peak is going to be — most times you only recognize the peak once it’s past, and when it is past, it can pass quickly and prices can move down even quicker. A bear market, on the other hand, lasts on average twice as long as a bull, and you can see the bottom. Prices typically head down to where they originally came from. You can see this on the charts. It goes down and trades sideways for weeks, at times for months.

That’s where we’re at right now. Commodity prices in general are going to trade sideways to lower for much of 2016 — but I don’t want to say there won’t be opportunities to price grain profitably. There will be, there always are, even in bear markets. But for a farmer the important thing is going to be to understand that we’re in a bear market. Commodity prices can occasionally break higher, but those opportunities will be fleeting. Farm marketers need to be ready to move when the opportunities present themselves. If they’re not, profitable pricing may be missed.

In this new economic environment, believing that bear markets are simply temporary and that higher prices will reassert themselves takes on a much higher degree of risk for the grower. Prices will not be as responsive as global markets work through these economic issues. There will be short-term opportunities — like the weather market we saw in early summer when farmers and traders were concerned about drought. But these events are opportunities to price profits. Production was an unknown making cash contracting a risky business. But there are market tools out there like put options that don’t expose you to delivery commitments. The key heading forward is for the grower to be ready to move on rebounds and profitable pricing opportunities.

Remaining paralyzed while you wait for prices to recover to past levels may be self-defeating. You can really see this occur in any market. It’s a common error whether it’s a real estate investor or a grain producer, and one you can’t afford to make in the current global environment.

CG: Why do market cycles always repeat? Where are we globally in terms of the markets? What are the knowns and unknowns?

EA: Market cycles always repeat because markets are simply made up of people and their emotions. As a result, they are somewhat predictable. We are all human, and markets reflect emotions that swing between fear and greed. This is natural, but it must be respected.

When markets experience a sudden setback, the greed that contributed to the market rise is quickly replaced by hope that prices will recover. Then, as prices continue their descent, these emotions are replaced by fear. And if the drop continues, panic selling can set in, driving prices even lower.

This is natural, but you don’t want to get caught up in it. These emotional market swings directly impact the profitability and success of a business. And 2016 will already be challenging enough in all markets, including global grains.

When assessing commodity markets, we really need to understand what’s affecting economies globally. In a very real way, we’re still working through the after-effects of the global financial crisis of 2008. At the time it was said that we were potentially facing another Depression. But central banks really pulled out all the stops with tools like quantitative easing, which is money printing and lowering interest rates in an attempt to kick-start inflation and the economy.

These strategies served to kick the can down the road. But we’re simply not out of the woods yet, and I really don’t think we’re going to see the Federal Reserve increasing U.S. interest rates for the foreseeable future. There’s simply too much market contagion risk for the Fed to follow through on raising rates — though it’s made the wrong decision in the past, so anything is possible.

What markets are going through right now is eerily similar to 1937, and students of economic history can tell you that was a very significant year when rates were hiked prematurely. This decision choked economic recovery, prolonging the Depression until the outbreak of the Second World War. Right now there really is little inflationary pressure, but increasing deflation risks.

Central bankers really fear deflation because they can’t combat it. Consumers reinforce it by delaying purchases. This can become a deflationary spiral because it feeds on itself forcing prices to drop — a self-fulfilling prophecy.

Right now, we have a lot of unused capacity in electronic manufacturing. And the price of consumer electronics is dropping globally. In fact, the cost of an Apple iPhone, for example, may actually drop over the next year as global competition heats up from Asia.

For a farm in Canada, inputs are impacted by supply and demand and the value of the Canadian dollar. It’s possible some input prices may decline as a result of these deflationary pressures, but we may also need the added push of a gain in the loonie.

CG: You’ve said you think market volatility, especially in a down market, is a good thing. Why is that?

EA: That’s where you find profitable pricing opportunities in these sort of markets. Farmers often fear volatility, and find it stressful, when really they should be embracing it. Without periods of market volatility, they wouldn’t likely have many opportunities to price grain profitably. But it needs a trigger of some sort — weather or political unrest, for example — that causes buyers to become concerned about supply and speculators to buy the market. This can lead to sharply higher prices but often with a short shelf life.

Without volatility, commodity prices would just trade sideways, potentially at unprofitable levels for long periods of time. So when price volatility heats up, farmers should embrace it and plan for it. They should understand what their cost of production is, and have a price that they’ll execute on. Doing this will take a lot of the emotion out of their marketing decisions. And a plan supports their profitability and future goals for their farm business. If price volatility is high, this can generate some attractive profits, particularly during heated weather markets when prices often surge well above their true economic value.

CG: In this sort of environment, what are some of the common marketing mistakes producers make?

EA: There’s a handful of common errors that any marketer should do their best to avoid and to not fall prey to.

There’s seeking the highest price possible, which is an admirable goal but highly unrealistic. What’s much more likely to happen is they’ll hold their grain too long, miss the peak, and ultimately sell into a falling market. Often the price achieved here is less than if they had sold following their marketing plan. Let’s take canola for example. The cash market through the early fall was hovering around $10 per bushel, and an efficient producer might have a cost of production of $7 a bushel — there’s profit there. Within the last couple of years, canola bids have been as high as $14 per bushel. But holding out for higher bids later in the crop year is always a gamble. Given the turndown in economies, chances of canola rallying toward past heights are slim at best. The best decision may be to lock that profit.

There’s also the thinking that if farmers don’t get the price they want, grain should just be stored. This strategy just works once in a while, but the truth is, it could be a long wait. There’s lost opportunity cost not getting needed cash flow, as well as risk of theft and spoilage. They’re assuming a lot of non-price risk by storing grain. And in my mind, they should be planning to market their grain in the same crop year they harvest it.

Another error may be assuming the market owes you a higher price because you got it before. But the truth is, markets today are about what the buyer is willing to pay. In the commodity world, we are now in a demand-driven price structure. And what you sold for last year is meaningless.

During lean times, good managers and marketers distinguish themselves. Marketers who can take emotion out of the decision-making process and conduct business in a clear-eyed fashion set themselves up for success, especially when conditions improve.

CG: You’ve always told me there’s a difference between being a farm speculator and a farm business manager who’s pursuing defined goals.

EA: The most important thing to understand is we have both a speculative and a business side to all of us. It’s just a matter of the degree. It can be really easy to unknowingly blur the lines between the two. We can all get carried away by the emotion of it all — getting too excited, trying to hit a market peak or even increasing business risk by scaling in unneeded long futures positions while the grain remains unpriced.

The things that can really get you into trouble are the lack of a plan, and the inability to price in a rallying market. This can lead to lost opportunity and lost profits. In 2016 we’re going to be looking for a weather market — something that causes the bear cycle to break. A good farm marketer understands weather markets are often a temporary boost. And during this cycle of lower global commodity prices, it’s important to be ready to act when the opportunity allows a cash price to achieve a pricing target.

On the flip side, a farm speculator tends to watch prices in the attempt to hit the peak. The risk there is you can become mesmerized by the market and the daily swings. You’ll watch markets almost obsessively, waiting for the right price to convince yourself to let the crop go, but then fail to act. Without a plan and the discipline to execute it, it’s really easy to become a speculator without knowing it.

A lot of people have this image of a speculator as a wheeler-dealer when in reality it can be all of us, if we’re not careful. Here’s a warning sign. If you price a crop profitably, and the market then goes higher, do you obsess about the money “lost,” rather than acknowledge your plan worked and grain was consistently priced profitably? In reality, a rallying market is an opportunity to look toward pricing new crop production. This offers just another solid business opportunity. It’s all about how you look at markets, and your ability to handle emotion.

This article was originally published as ‘The right price’ in the November 2015 issue of Country Guide.

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