Expect more crop price volatility

This is the time of year when grain markets are supposed to be dull and boring. Not anymore! There is no fundamental news from the northern hemisphere because it is winter. South Africa is doing well and Argentina is getting a bit of rain. After a dry start, Brazil is getting rain just as harvest is starting in the north. This is a negative and soys are responding. The same thing happened earlier to Australian wheat. After a prolonged drought, it finally started raining and spoiled the quality of what little harvest there was. This was just one of many factors that caused the explosion of wheat prices and the resulting absence of cheap bread in the stores. The supply outlook for all grains is historically tight. China’s imports of soybeans are up 17% this year and its exports of corn are only 20% of what they were several years ago. Looks like they are spending their hoards of foreign exchange on something useful like food. North American farmers are trading grain for cheap tools!

The old expression "a rising tide lifts all boats" is well at work in the grain sector. On every farm, there is a bidding war for crop acres. Some acres are locked up several years in advance with crops like hay. Other crops are locked in because of rotation concerns. "Wheat after wheat, no bread to eat!"

Many farmers buy their corn seed in the fall to get the discounts and that sort of sets their minimum corn acres. There is a reluctance to back out of these commitments. So that mainly leaves soybeans, spring wheat and extra corn acres to fight over the remaining available acres.

The grain markets attempt to influence the decision by "waving money"! Farmers try to figure the best net return per acre while considering other factors like time, risk, storage, and labour. Soybeans are roughly two and one half times the price of corn so if one goes up, the other follows. The climax of the bidding war occurs near the end of March when the USDA releases the "Planting Intentions Report". This is based on farmer surveys. Markets can swing violently after the report as buyers attempt to alter the farmers’ decisions.

What are the possibilities? In States where corn yields are high, corn will prevail in spite of high input costs. The risk is lower for them and corn is more fun to grow. I read a quote from an American farmer who said "soybeans are just like turkeys and sheep, always looking for a new way to die!" In less favoured States and Ontario, I expect that soybeans will steal acres from corn. Spring wheat will steal from both the other crops in the northern tier of States because inputs are low and net returns on forward contracts look really good for those who can get the yield.

Prices like we see now have historically only come around once in a generation. If the index funds pull their billions of dollars out of the grain markets for some new opportunity, we won’t know what hit us. If prices get too high, there is the possibility of export embargoes that can kill markets overnight. Argentina does it all the time; I believe it was President Carter who did it to soybeans and it happened to my barley in the late 1970s when export permits were frozen. That killed barley as a cash crop in Western Ontario. Perfect weather is a long shot but it would relieve the pressure and allow supply to build. A collapse in the price of crude oil would be hard on both corn and oilseeds.

Waiting for better prices has paid off but I think it is time to take little nibbles of old crop sales and new crop forward contracts to protect what we have. The stakes are high and sometimes you can wait too long.