Grain markets could get worse

Grain prices look terrible in the context of the last few years, but they could fall further because of mounting supplies.


It means Canadian farmers should consider using marketing tools to price 2014 production and arrange delivery opportunities for new crop, said Neil Townsend, director of market research for CWB.


The previous shortages in grain were solved this crop year with its huge global corn and wheat crops, so the lingering supply squeeze in soybeans will likely end soon.


Record large soybean crops in South America are developing without major weather threats, and American farmers are gearing up to seed a record large soybean acreage. U.S. winter wheat looks good.


“There is only one statistic that matters in the globe … and in Canada too about the general direction of prices, and that is, what are stock levels doing, how are they changing?” Townsend said.


“This year we have a perfect storm of bad news. The magnitude of stocks is huge and the direction is up.”


Canada will carry a record large canola supply into the new crop year, exacerbating the global problem.


“The crop we grew this year is not a 12 month issue. It is a 12 to 24 to 36 to 48 month issue. We are going to be dealing with the tail of this crop for many years.”


Townsend suggested locking in values now available in the November 2014 canola futures market. 


“I want to stress that this is still a great opportunity … it is on the way down if everything behaves normal,” he said.


“We expect the same amount of (total) acres next year. Applying a trend yield analysis, we get a slightly smaller corn crop and slightly smaller wheat crop, but we get an all time record soybean crop.”


Townsend thinks wheat futures could trade below $5 per bushel in 2014-15. Corn could also fall.


“I think that in 2014-15, we trade corn below $3. People forget we did trade below $3 in 2009-10, so it has happened in the so-called post 2007-08 era.”


Other factors are also working against a grain price recovery. 


The big annual increases in ethanol production that triggered demand for corn and helped force prices higher have now leveled off.


The North American cattle herd is the smallest in decades, meaning less demand for feed grain.


Also, the big investment funds that poured into commodities as crude oil and metals rose are now draining their money out, pursuing better opportunities in the stock markets.


Townsend said the experience of the past few years, when markets allowed opportunities to lock in profitable prices for several years into the future, should prompt a change in thinking. 


He said he was in Kansas last spring and saw an American farmer sell 2016 corn at an excellent return over production costs. From today’s vantage point, that was a spectacular deal.


“We tend to think in 12 month chunks, but we should think longer in terms of risk management.


“We should get comfortable doing some hedging, should get comfortable using options, getting comfortable protecting prices when they are high.”


Farmers always worry about locking in a sale but then not producing enough to meet the commitment. 


That risk is diminished this coming crop year because there will be lots of grain in the bin even before harvest.