How comfortable are you about crop prices?
I suspect lots of farmers feel a little complacent with the super-high prices we’ve seen since 2007 and aren’t doing enough to protect themselves against a possible big downside.
I use the word “possible” because, as always, it’s impossible to peg how the future’s going to work out for crop prices.
We experienced an incredible price surge last summer as the U.S. Midwest drought bit in. That’s a form of volatility, but it’s the kind of volatility that’s easy for crop growers to handle. After all, the worst that would have happened to farmers who didn’t make 2012-13 sales until December or January, when prices reached their lows, would have been $13 per bushel canola and $9 spring wheat.
So you might have missed some big highs, but the leftover prices still provided a profit.
Volatility also goes the other way just as sharply. Just look at what happened in 2008. Futures prices can collapse and basis levels spread wide as demand dies. The two events — the 2008 blowoff and the 2012 drought rally — show what can happen in this environment.
Spring wheat futures have held above a $7.50 bottom since late 2010, but is that really the lowest they can go? How about canola? Is $11 the lowest canola futures can really go? Is $6 wheat impossible? How about $9 canola?
I have been thinking about this because I covered a speech by Cargill Canada president Len Penner last week in which he touched upon two of my favourite subjects: the long-term agricultural commodity bull market and volatility.
Penner believes the era of high crop prices won’t end any time soon. There’s just too much demand in the world for crops to get cheap again. But what’s expensive and what’s cheap in the post-2007 world?
Penner said he doubts we’ll see $3 or $4 wheat again, or $2 or $3 corn, and that seems reasonable. We appear to have moved to long-term higher plateau price levels.
But that doesn’t mean today’s prices, even after the fall from the drought rally, are long-term bottoms. They could be nearer the upper levels of the new range than the middle or bottom.
“It’s unlikely that (prices) will stay at record levels,” said Penner.
“They will come back as the storehouse is filled back up.”
So when will that be? That all depends on the weather. And maybe there will be another Midwest drought this year and prices will hit even higher highs.
But where Penner was speaking offers a sobering lesson to complacent grain farmers: the Manitoba Swine Seminar.
Hog producers, at least those who weren’t adequately hedged, were devastated in 2012 by the spike in feedgrain prices. Many have gone out of business.
Some I’ve spoken to said they didn’t hedge feedgrains last spring and summer because “the outlook was for lower prices.” That was a “reasonable expectation.”
So what’s your reasonable expectation on canola and wheat prices? How much of your financial viability is wagered on those assumptions?
Look at a chart of what happened in 2008 and 2009 and decide how comfortable you are if you aren’t hedging.
Here are some of Penner’s words to ponder. There’s no stunning insight here, but sometimes the obvious is something we forget.
“Volatility is unexpected. You don’t know when it is going to happen.”
Hopefully you’re on the right side of the next volatility eruption.