Farmers are sitting on too much wheat and may not be able to empty their bins when they hope, according to a major grain company.
“It has become evident to us that there could be a rude awakening,” said Len Penner, president of Cargill Ltd.
Growers are on pace to ship a total of 13.3 million tonnes of wheat in 2013-14 based on exports so far, according to the Canadian Grain Commission. That is well below Agriculture Canada’s forecast of 14.8 million tonnes.
Penner believes growers have misjudged the market, which is part of the learning curve associated with transitioning from the single desk to an open market for wheat and barley.
“The farmer has to disconnect when he prices his crop in the market versus when he chooses to move his crop. Those are two separate decisions,” he said.
The Canadian Wheat Board used to act as a logistics control valve, telling farmers when they could deliver a certain portion of their wheat into the system to ensure a steady flow of the crop to the ports.
In Canada’s export system, grain has to be pulled from about 70,000 farms across Western Canada to vessels waiting at the ports.
Penner said the industry can’t flip a switch and suddenly ship a pile of grain to Vancouver.
“You need to move grain every single month of the year,” he said.
Penner worries that growers are sitting on too much grain and expecting to move it all before seeding.
“If everyone decides to move their grain in March or April, it won’t all happen,” he said.
Neil Townsend, director of CWB Market Research, is less concerned.
Farmers had delivered 11.33 million tonnes of the crop as of March 17, which is ahead of last year’s pace and well above the five-year average.
“I don’t find that particularly egregious in terms of where they should be,” he said.
Townsend noted that the CGC’s export number is often below Statistics Canada’s because it doesn’t include factors like trans-border shipments.
He believes grain companies are frustrated because they want to buy grain but farmers aren’t selling.
“They don’t see the prices going higher but the farmer is still lingering with the memory of the pre-Christmas time,” said Townsend.
Tyler Russell, Cargill’s national grain marketing manager, thinks growers could miss the boat literally and figuratively. He wonders why they haven’t sold more grain in a year with record high prices and great quality.
“That should be the year you’ve cleaned out the bins,” he said.
Russell said farmers need to realize that 23 of the 50 wheat harvests in the world occur in June, July and August so competitive supplies are just around the corner.
“We have to think globally,” he said.
Townsend agreed that the market highs are long gone but he doesn’t fault growers for holding onto the crop.
He thinks there’s one more price bounce remaining in wheat markets before the pending downturn. Futures prices might climb back as high as $8.40 per bushel but $9 wheat is a thing of the past.
Townsend said the bounce will be caused by a supply crunch in U.S. feed markets. Corn stocks are dwindling and wheat is increasingly making its way into livestock rations.
He forecasts that a lot of wheat will be fed for the remainder of 2012-13 and during the first quarter of 2013-14, which should result in a wheat price premium over corn in the nearby spread.
The party will come to an end when what is looking to be a terrific Black Sea region wheat crop hits the market and when markets gain confidence in what is expected to be a massive U.S. corn crop.
Penner said that aside from farmers clinging to too much of their wheat, the transition to an open market has been smooth, thanks in part to Mother Nature.
“We were very fortunate in one sense. We had a good average crop. It matured relatively early. It was dry, and the grades were in a very narrow band,” he said. “It was as good as it gets from a wheat production perspective, which is probably good for a transition year.”
The industry shipped record amounts of grain during the first three months of the crop year. Farmers were able to market the wheat they wanted and domestic and international customers got what they needed.
“You can sit back and look at that and say, ‘It has gone good. Canada did not tarnish (its) reputation as a major provider of wheat globally,” said Penner.
As expected, Cargill and other grain companies are experiencing grain handling efficiencies by having full control and view of the supply chain. Cargill’s Vancouver terminal has been moving record volumes of grain on a monthly basis.
“Just that one piece has allowed us to be more efficient than we have been in the past,” said Penner.
But he remains concerned about how the 2012-13 marketing year will finish given the amount of grain still sitting on farms and the potential for big crops in the U.S. and the former Soviet Union.