Canadian grain farmers are sitting on an above average crop at a time when prices are nearing and in some cases exceeding record levels.
“Now you have to strategize how to take advantage of that,” said Neil Townsend, director of CWB Market Research.
His advice is for growers to market a significant portion of their anticipated production in 2012 and 2013.
At the beginning of this week, Minneapolis wheat was at $9.22 per bushel for the 2012 crop and $8.70 for the December 2013 contract.
“How many times have we sat down and looked forward two Decembers and seen ($8.70) wheat?” said Townsend.
“In 2013, I would give serious thought to pricing your first 10, 12, 14 bushels (per acre). Trust me, a lot of American farmers are doing exactly that.”
The price rally that wheat and other crops are experiencing stems from a severe drought in the U.S. Midwest, which grows 80 percent of the country’s corn and soybeans.
“One word sums it up pretty well, which is ‘catastrophe,’ ” said Dan Basse, president of AgResource Company, an agricultural advisory firm based in Chicago.
It is shaping up to be the fifth or sixth worst drought on record in that country.
Forty percent of U.S. corn and soybean crops are rated good to excellent compared to 69 and 66 percent, respectively, a year ago. Spring wheat is in much better shape with 66 percent falling in the good to excellent category versus 73 percent a year ago.
“We believe U.S. corn yields will fall at least 20 percent. That’s the biggest yield decline since the 1988 drought when we had yields in that crop year fall 30 percent,” said Basse.
AgResource is forecasting an average corn yield of 140 bu. per acre, which is well below the U.S. Department of Agriculture’s initial estimate of 166 bu. Basse fears the yield potential will soon drop to 132 bu. if weather conditions don’t improve in a hurry.
Soybean prices established a new all-time high June 9, while corn prices started this week 14 cents below the record high of $8 per bu. set one year ago.
“The market is doing its job in trying to send the message that we need to change biofuel policies or there’s going to be tremendous liquidation of the U.S. livestock herd,” said Basse.
The U.S. ethanol industry will consume an estimated five billion bu. of corn, or about 43 percent of this year’s anticipated crop, unless the federal government steps in.
Basse expects the U.S. Environmental Protection Agency will eventually reduce the federal ethanol mandate by 20 to 25 percent, but corn prices may have to rise as high as $9 per bu. before politicians respond.
That would help douse the fire in grain markets, as will what is expected to be massive corn and soybean plantings in Latin America this fall.
“Historically speaking, when you have droughts in a significant producer like Russia or the United States, we make a high spike in price and then we decline in values for 18 to 24 months, and I don’t see why this should be any different than that,” said Basse.
Townsend agreed that the market will remain bullish for a while yet before it turns south.
“The ball is in demand’s court now,” he said.
Buyers held off on making purchases this spring because analysts were telling them there was a huge U.S. corn crop coming that would drive prices down.
“A lot of them are not as covered as they should be,” said Townsend.
He believes the next two to five weeks could be interesting as buyers attempt to cover the shortfall.
Basse said the world is increasingly counting on Canada to fill the supply void caused by drought in the United States and smaller than expected crops in the European Union and the Black Sea region.
Canadian growers appear to be doing their part, according to Statistics Canada’s latest satellite map of crop and pasture vegetation on the Prairies.
The map compares vegetative growth for June 2-8 to normal growing conditions for the same period between 1987 and 2011.
“I can say that probably 90 percent of Western Canada is either better or much better than normal,” said Gordon Reichert, a senior scientific adviser with Statistics Canada.
The map is almost entirely green or dark green.
“When we see this kind of colouring, it’s an indication that the vegetation is doing extremely well,” said Reichert.
A good rule of thumb is that better vegetative cover results in higher crop yields.
Statistics Canada will issue its first yield estimates for spring wheat, durum, barley and canola based on the satellite maps July 23.
Townsend is already pencilling in higher yields for the two largest crops grown in Western Canada. He is forecasting a 40 bu. per acre average for hard red spring wheat and a 35 bu. canola crop, up from their respective trends of 37. 5 bu. and 32 bu.
“We’re anticipating some pretty healthy yields,” he said.
However, Townsend doesn’t expect that to result in a burdensome supply of spring wheat because of the amount of acres eaten up by canola. He is forecasting 15.3 million tonnes of spring wheat, a 600,000 tonne increase over last year’s harvest.
“The world can easily absorb that,” he said.
Basse said things couldn’t be shaping up much better for Canadian grain farmers as they reach the midway point of the growing season.
“They have the benefit of having a big crop potential with a big price,” he said.