ST. JEAN BAPTISTE, Man. — Farmers should get ready to take any good price they see this year, says Brad Magnusson, who advises credit unions in Manitoba.
The global underpinnings for strong commodity prices are vanishing, he said in an interview during St. Jean Farm Days Jan. 8.
“That trend (of weak prices) isn’t just in grain commodities,” he said.
“We have ended the 10 year (bullish commodity) cycle, and we’ve started to come down the backside of the cycle.”
Magnusson said ample supplies in the Northern Hemisphere and the prospect of large South American harvest crops are pushing down crop prices.
However, supply isn’t the only factor behind the crop price weakness.
He said the 2012 drought in the U.S. Midwest broke crop prices away from the rest of the commodity complex which was already weakening.
As the crop shortages disappeared with the 2013 harvest, crop commodities realigned with the rest of the commodity sector.
If other parts of the commodity sector weaken further, it should be reflected in crop prices. Magnusson said he wouldn’t be surprised to see oil prices in the mid-$70s per barrel this year, which won’t help oilseed or cereal grain prices, both of which are partially valued as energy crops.
The big commodity rally in the mid-2000s was partly triggered by investors fleeing the faltering stock markets as the financial crisis took hold.
“People looked to opportunities in commodities, and that raised the commodities,” said Magnusson.
“Now the U.S., and to a small degree Europe, are coming out of that and that money is going back, coming out of the big commodities and into things like real estate and stocks.”
Given general commodity weakness, farmers need to diligently price and hedge their old and new crops this year.
“If we’re going to be in an excess supply situation, we need to be taking every opportunity to look at markets on a daily basis and really look for small opportunities whenever prices rally to make some sales and price into next year,” said Magnusson.
Farmers also need to be more careful with the other side of the profitability equation, which wasn’t as big a concern in the bull market.
“Watch your costs,” said Magnusson. “We expect this (bearish) trend to continue for the foreseeable future, one, two, three years. Those cost structures are going to be very important. How much are we paying for land? How much are we paying for fertilizer? These are all going to be key components to being successful over the next few years.”